The Trump administration's influence on U.S. Treasury yields has stirred expectations in the bond market of a potential shift in bank leverage requirements.
Traders are speculating that regulators may soon review the Supplementary Leverage Ratio (SLR), a rule mandating large U.S. banks to hold extra capital against U.S. government debt and central bank deposits.
A revision of this policy could reduce the amount banks must set aside for safe assets, such as Treasuries, potentially easing Treasury yields and driving demand.
This anticipated change follows remarks by U.S. Treasury Secretary Scott Bessent about the administration's focus on Treasury yields, vital to global financial markets and consumer borrowing costs.
Currently, the White House and the Treasury Department have not commented on these developments.
If implemented, Ryan O'Malley of Ducenta Squared Asset Management believes the SLR review would benefit the Treasury market and enhance banks' credit profiles by freeing up balance sheets for additional asset investment.
The Bank Policy Institute (BPI) emphasizes the importance of promptly recalibrating the SLR to ensure market stability amidst increasing government debt issuance.
Francisco Covas of BPI suggests that regulatory adjustments to the SLR could happen swiftly and should be prioritized by U.S. regulators.
Recent widening of swap spreads over Treasury yields indicates growing anticipation of an SLR review, with interest rate swaps serving as a tool for hedging interest rate risks.
The Federal Reserve has previously exempted Treasuries and central bank deposits from the SLR temporarily during the COVID-19 pandemic to increase liquidity.
The ongoing focus on SLR comes as part of broader regulatory improvements targeting liquidity in the Treasury market, including the SEC's new rule on trade clearing through June 2026.
Lisa Galletta from the International Swaps and Derivatives Association advocates for SLR reform to ensure bank support for the U.S. Treasury market remains unimpeded.
Deutsche Bank has cautioned that SLR changes might have limited impact on reducing risk premiums and could potentially heighten banking system stress requiring fiscal intervention.