Treasury Secretary Scott Bessent indicated that US regulators might ease a rule this summer that has limited banks' trading in the $29 trillion Treasuries market.
“We are very close to moving” on the so-called supplementary leverage ratio (SLR), Bessent said. He mentioned that the three primary bank regulators — the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. — are addressing the issue.
Bessent’s comments gave a boost to a hedge-fund bet that Treasuries will outperform interest-rate swaps. This wager had faced challenges due to a surge in long-dated yields and depends on regulatory adjustments to the SLR. Thirty-year US yields were trading around 5.02%, with the spread against comparable-maturity SOFR swaps increasing by about two basis points following Bessent’s statements.
Adjusting the SLR, which mandates banks hold capital when trading Treasuries, could potentially lower US Treasury yields by tens of basis points, according to Bessent.
The SLR does not apply risk weightings to assets, meaning it treats US government debt — a global financial system benchmark — the same as riskier assets. Banks argue that the capital rule limits their ability to add Treasuries during times of stress.
The SLR's application to Treasuries was suspended during the Covid crisis but has since been reinstated. Bessent and Federal Reserve Chair Jerome Powell have previously supported modifying the rule.
Although the change might increase banks' interest in Treasury bonds, it is unlikely to significantly affect their overall capital requirements, as they also contend with risk-weighted rules and annual stress tests that determine minimum capital levels.
This article has been published in bloomberg.com via Yahoo News.
