Thursday, August 13, 2025
Core US inflation is expected to tick back up to 3% for July, a worrying sign for longer-dated Treasury securities as inflation may climb to 4% in the coming months.
- Core US PPI for July is anticipated to reach 3%, with core CPI already confirmed at 3.1%.
- Inflation rates are projected to rise in the next 3-6 months, potentially hitting 4%.
- Proposed changes to the enhanced Supplementary Leverage Ratio (eSLR) could boost Treasury demand by up to $3 trillion.
- Rising fiscal deficits and increasing Treasury supply are key concerns for the market.
- Economic data from the UK and eurozone will precede US PPI and jobless claims reports.
Get ready for a bumpy ride in the Treasury market. Core US Producer Price Index (PPI) inflation is likely to climb back to 3% for July, a stark contrast to the 3.1% year-on-year figure confirmed earlier this week for core Consumer Price Index (CPI). The real kicker? These inflation rates could easily surge to 4% in the next three to six months, spelling trouble for longer-dated Treasury securities.
eSLR Rule Changes Offer a Potential Lifeline for Treasuries
On a brighter note, proposed adjustments to the enhanced Supplementary Leverage Ratio (eSLR) for Global Systemically Important Banks could inject a significant boost into Treasury demand. These changes, open for public comment until August 26, 2025, might allow broker-dealers and depository subsidiaries to hold an additional $3 trillion in Treasuries or reserves. That’s a substantial 9% increase in marketable debt over time, a welcome influx for Treasury bulls.
The impact of these eSLR changes hinges on how quickly they are implemented. A more gradual rollout would soften the blow, while immediate inflows could provide a more pronounced positive impulse. Similarly, stablecoins backed by Treasury bills could also spur demand. However, this potential demand needs to keep pace with a significant increase in Treasury supply, fueled by a $2 trillion fiscal deficit that adds roughly $10 trillion to outstanding debt over five years.
While this additional demand potential could offset some fiscal and supply concerns, it might not entirely silence worries about tariff-related inflation. The looming rise in US core inflation over the next three to six months remains a significant headwind for longer-dated securities. Furthermore, any Fed rate cuts perceived as politically motivated could exacerbate pain for these longer-dated bonds, suggesting there’s no easy win for Treasury bulls.
Key Economic Data on Deck for Thursday
As European markets stir, the United Kingdom is set to release its second-quarter GDP figures. So far, monthly data has painted a weaker picture, partly due to front-running US tariffs affecting exports in the first quarter.
Across the eurozone, investors will be watching for final inflation data for July and the bloc’s second reading of second-quarter GDP. Additionally, June’s industrial production data will provide further insights into the economic landscape.
Following the UK’s morning data release, US economic indicators will likely take center stage. The details within the US PPI data will offer clues about expected Personal Consumption Expenditures (PCE) inflation, the Federal Reserve’s preferred inflation gauge. Markets will also be closely monitoring jobless claims, particularly continuing claims, which saw a surprising uptick last week.
