Private issues/Public solutions

Substack Post Week February 23-27

The most important development in global markets right now is not Bitcoin’s volatility or AI-related equity narratives. It is once again the increasingly visible strain in private credit and the corresponding shift of regulated financial institutions into a defensive liquidity posture. The adjustment is already underway in balance sheets, forward rate markets, but also sovereign bond allocations. It reflects a reassessment of credit risk and macroeconomic durability that stands in sharp contrast to the still-compressed signals coming from parts of public high-yield markets.

Start with the government bond complex. The US 10-year Treasury yield is testing the 4% threshold, down roughly 30 basis points over the past month. The 2-year is approaching 3.40%, both levels sitting near the lower end of their multi-month ranges. These moves align with a broader bull-steepening pattern also visible in SOFR futures. Since late January, longer-dated contracts through 2026 and 2027 have attracted consistent buying, reflecting growing conviction that short-term rates will eventually move lower despite continued hawkish rhetoric from the Federal Reserve. This configuration historically appears when markets anticipate credit deterioration and policy easing driven by economic weakness rather than inflationary resurgence.

At the same time, regulated institutions are behaving defensively. European monetary financial institutions added approximately €94 billion in government bonds in January, the second-largest monthly increase on record. In the United States, primary dealers have expanded Treasury inventories to roughly $423 billion. Although the motivations differ somewhat, European banks managing systemic liquidity versus US dealers facilitating market intermediation, the common denominator is clear: institutions are increasing exposure to high-quality liquid assets in anticipation of tighter funding conditions and rising credit risk.