According to U.S. Treasury Secretary Scott Bessent, he has a plan that should contribute to lowering long-term Treasury yields, which serve as a standard for interest rates. However, there is still a significant question: Will it work?
In theory, banks should be able to hold more U.S. government debt, lend more freely, or both if the supplementary leverage ratio is likely to be lowered. Established in 2014, the SLR mandates that banks maintain a certain level of high-quality capital in relation to their overall leverage exposure in order to guarantee that they have enough capital to withstand losses, especially during times of stress.
The banking industry has already expressed support for a possible SLR overhaul, which has been discussed for months. When Bessent stated in an interview with Bloomberg Television last Friday: “I believe we are very close to moving the supplementary leverage ratio, SLR,” it came to light. Between the three banks regulators—the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—that is proceeding extremely swiftly. “So I would think we could see something on that over the summer.”
Investors’ willingness to continue purchasing U.S. government debt and the source of future marginal buyers have been called into question by uncertainties surrounding the Trump administration’s tariff intentions. The 30-year Treasury yield BX:TMUBMUSD30Y reached about 5.09% last Wednesday, the highest level since Oct. 25, 2023, according to 3 p.m. Eastern time estimates, as a result of a recent bond-market selloff. Concerns regarding the U.S. fiscal future have only increased since President Donald Trump’s tax and spending megabill narrowly passed the House of Representatives last Thursday, sending the package to the Senate.
Lowering the SLR might support Trump’s broader objective by lowering long-term borrowing rates for families and companies, encouraging economic development, and possibly allowing banks to lend more or convince them to add more Treasurys to their balance sheets. Traders speculated that the SLR regulations might be revisited after the administration promised in February to concentrate on controlling long-term Treasury yields.
The ratio is essentially at least 5% for the eight internationally systemic important banks in the United States that are subject to an increased SLR. The SLR for other banks is at least 3%.
“Well, I think it could, because banks are being penalized for holding Treasurys, because there is a large supplementary leverage charge,” Bessent said in response to a question from Bloomberg about whether decreasing the ratio could have a significant material influence on Treasury yields. Therefore, I believe we can lower that in order to hold the risk-free asset. Additionally, I’ve read projections that suggest we could reduce yields by tens of basis points. Undoubtedly, it was momentarily removed during the COVID crisis, and it had a significant impact.
Others, however, are unsure.
Bessent’s assertion was questioned by Peter Boockvar, chief investment officer at the Bleakley Advisory Group and writer of the Boock Report newsletter, who wrote in a note published Tuesday that the Treasury secretary “might be too optimistic.”
Boockvar noted, among other things, that a reduced SLR might not make banks more active Treasury trading. “The Fed will have to intervene, which is just a bad policy idea, in my opinion,” if this proves to be the case. The Fed must step in and act as an intermediary whenever there is a market turbulence,” he stated.
Additionally, according to Boockvar, banks might not be seeking to increase their Treasury holdings. Even yet, the 2023 failure of Silicon Valley Bank, which had a portfolio of investments largely centered in long-dated Treasurys, is still vivid in people’s minds.
“The experience of Silicon Valley Bank would most likely mean they would be buying T-bills rather than adding much duration,” Boockvar stated, referring to the banks that will be increasing their Treasury holdings in the future. “I thus think the long end of the U.S. yield curve is going to have to find other help.”
After Japan hinted that it would be open to modifying its long-dated issuance, U.S. government debt was rising as of Tuesday afternoon. The 30-year bond led the rally, lowering its yield by 10 basis points to 4.93%. BX:TMUBMUSD10Y, the 10-year yield, fell 7.5 basis points to 4.43%. The DJIA SPX COMP, one of the three main U.S. stock indices, increased in the meantime.
