One Reason U.S. Treasuries Don’t Seem That Worried About Inflation
Yields on government bonds might be agreeing with the Federal Reserve that price pressures are transitory, but they could also just be artificially low thanks to a constellation of arcane money market rates.
In the aftermath of the 2008 subprime crisis, regulators became determined to stamp out the kind of funding stresses that had brought the financial system to its knees. Efforts at shoring up the system included new liquidity requirements that required large banks to hold big buffers of ostensibly safe and liquid assets that could be used to protect against outflows.
These portfolios typically fall under the umbrella of High-Quality Liquid Assets, or HQLA, but another way of thinking about them is as a form of bank bondage — a requirement that forces banks to keep large amounts of generally low-yielding securities like U.S. Treasuries (which can be used as collateral in the repo market), agency mortgage-backed securities (MBS) and reserves — on their balance sheets.