Barclays Warns $26T Treasuries Overhaul Will Stunt Systematic Trading by 2026

Key Takeaway

• Barclays warns SEC's regulatory overhaul of US Treasuries market may hinder electronic systematic trading due to increased clearing friction.
• The $26 trillion US Treasuries market will face central clearing requirements by mid-2026, potentially reducing liquidity and increasing costs.
• Cross-regional bond trading strategies will be impacted, with varying capital implications for assets like German Bunds and US Treasuries.

Regulatory Overhaul in Treasury Market

The Securities and Exchange Commission (SEC) is set to implement a sweeping regulatory change aimed at bolstering the resilience of the $26 trillion US Treasuries market. This overhaul, expected to culminate in mid-2026, mandates that the majority of Treasuries transactions be cleared centrally. According to Jeff Meli, head of research at Barclays Plc, this move could inadvertently increase friction in the market, potentially stunting advancements in sovereign bond electronic trading strategies.

Electronic systematic trading, which relies on reduced friction and high liquidity to minimize implementation costs, may face significant challenges under the new regulations. "The risk for the government bond market is that it might go in the other direction because of this," Meli stated. The regulatory changes are likely to have a pronounced impact in the US but will also affect cross-regional bond trading strategies due to varying clearing requirements and their different capital implications. Meli highlighted that systematic approaches, which use algorithms to exploit patterns by taking numerous small positions in different financial instruments, will be particularly challenged. "It’s going to create regional constraints and nuances where seemingly identical assets are no longer perfect substitutes for each other," he added, using German Bunds and US Treasuries as an example.

European Bond Market Turbulence

The global bond market is facing additional headwinds due to early weakness in European bond futures, exacerbated by the announcement of snap French elections. This development adds to the risks posed by this week's Federal Open Market Committee (FOMC) and Bank of Japan (BOJ) meetings, as well as the upcoming US inflation report. Early movements in bond futures suggest a widening spread between German and French 10-year debt, which will serve as a sentiment indicator for European risk assets.

Trading volumes remain modest, but a clearer picture will emerge once European cash markets open. Should OAT futures drop below the May nadir of 123.66, it would be broadly negative for G-10 bonds. This situation underscores the interconnectedness of global bond markets and the potential for regional political events to influence broader market dynamics.

Vulnerability of Bond Rally

The recent bond rally appears vulnerable due to unexpected payroll growth and earnings surprises. The frequency of large shocks in the monthly jobs data suggests that economists' forecasts are too clustered, according to Cameron Crise. This sensitivity to payroll surprises is the most significant since 2019, indicating that fiscal policy remains a crucial factor. Unfortunately, the current budget constraints suggest that austerity measures are likely, regardless of the outcome of the upcoming presidential election.

With inflation remaining sticky, a low jobless rate, and strong payrolls undercutting hopes for easing, the US economy resembles the 1990s era of small and cautious rate cuts. This scenario signals potential gains for stocks, cash, and short-dated bonds in the face of a resilient US economy. Garfield Reynolds notes that the Federal Reserve remaining on hold could be the best scenario for stocks, providing a stable environment for investors.

Street Views

• Jeff Meli, Barclays (Bearish on US Treasuries market):

  "The risk for the government bond market is that it might go in the other direction because of this [regulatory change]."
  "It’s going to create regional constraints and nuances where seemingly identical assets are no longer perfect substitutes for each other."