Rick Chan
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U.S. yields surged to begin 2022 as financial markets gird for central banks to begin tightening monetary policy.
Uncertainties that caused U.S. Treasuries to rally and yield curves to undulate in November may persist and could contribute to volatility into year-end.
The volatility that has roiled short-term bonds signals a shift in expectations for central bank policy in developed markets.
Market participants have been hesitant to accept SOFR as the successor to Libor, but uniting around a single reference rate is increasingly important to keep benchmark markets from becoming fragmented.
As regulators push to transition away from Libor, sales of Treasuries linked to the successor rate could boost the new benchmark’s credibility and expand nascent markets for related debt and derivatives.
The expiration of the temporary SLR changes should enhance the soundness of the banking system, but likely at the cost of Treasury market liquidity.
Markets largely held up in last year’s liquidity crunch, but we believe policymakers should address a few soft spots.