Good morning from Copenhagen, where we’re gearing up for an exceptionally exciting day.

Today’s main focus will be on the Fed, with less emphasis on Trump’s reelection and more on the potential discussion surrounding an end to QT. Such a move would represent another significant shift for risk-on assets. Liquidity has been notably tight, with past spikes in the SOFR versus Fed Funds futures spread, which have since normalized, alongside a widening in the term premium and the sharp decline in ON RRP (Overnight Reverse Repo) balances.

Asset-swapped Treasuries experienced a strong bid late in yesterday’s session and continued this momentum into this morning, driven by speculation surrounding potential deregulation by the Trump administration, which also led to major gains for bank stocks. This anticipated move could provide banks with increased flexibility to expand their balance sheets and hold more bonds.

A similar pattern was observed during the Trump administration’s first term in 2016, where deregulation efforts had notable impacts on the market. Currently, sovereign bonds in both Europe and the U.S. are at historically high levels relative to swaps. Even a modest shift in central bank balance sheet trends could significantly influence the trajectory of sovereign bonds at this stage.

Chart 1a: The mother of all signals to finally end QT?