Causal implications · Liquidity Regime · 2026-05-05

    Neutral funding, mild balance-sheet drain; credit cushions, long end pressured

    HA·C:M
    Regime read

    State B: funding pressure is neutral (50) while balance-sheet support is slipping (51, -0.8). Bank credit leads liquidity, but money growth drags. With HY OAS at 2.77 and VIX 16.99 already benign, spreads have limited room to compress; 2s10s at +0.50 suggests further steepening as long-end yields face term‑premium pressure.

    Transmission channels (asset · direction · mechanism)
    UST 10Y
    ▲higher
    QE fade lifts term premium; long yields rise as private float increases.
    magnitude uncertain3m
    UST 2s10s curve
    /steepens
    Long-end term premium rises while front end stays anchored by policy rate.
    magnitude uncertain3m
    HY OAS
    ◀▶tightens
    Improved bank credit and intermediary risk appetite compress excess bond premium.
    magnitude uncertain3m
    IG OAS
    ◀▶tightens
    Stronger credit supply lowers risk compensation for IG issuers; demand meets issuance.
    magnitude uncertain3m
    S&P 500
    ▲higher
    Lower risk premia from easier financial conditions support equities despite higher discount rates.
    magnitude uncertain3m
    Agency MBS OAS
    ▶◀widens
    Reduced Fed MBS demand lifts mortgage-specific premia; spreads widen vs Treasuries.
    magnitude uncertain3m
    Exposed sectors / factors
    BanksSmall capsHomebuilders/REITsCyclicalsUtilities
    What confirms it
    • ▲Curve continues to steepen (2s10s up)
    • ▲10Y yield edges higher vs front end
    • ▲HY spreads stay contained/tighten modestly
    • ▲IG spreads remain near lows
    • ▲Mortgage rates rise relative to 10Y (basis widens)
    • ▲C&I loan growth holds up
    What would invalidate it
    • ▼Curve flattens/inverts back below zero
    • ▼HY spread gap > 400 bps (risk-off)
    • ▼Sharp equity/VIX shock (VIX > 25)
    • ▼10Y yield declines materially vs 2Y
    • ▼Bank credit contracts

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