President Donald Trump has been calling for lower interest rates from the Federal Reserve, but earlier this month he said that for the central to hold interest rates where they were in its last meeting “was the right thing to do." Instead, his goal now was to lower yields on the 10-year Treasury, reportedly through indirect methods.
“In my talks with [the president], he and I are focused on the 10-year Treasury [yield],” Treasury Secretary Scott Bessent said in a recent television interview.
The question has been how the administration could achieve this end. The Fed strongly influences short-term interest rates, similar to the shorter end of treasurys. But it’s the bond market that directs and sets yields at the longer end. Investors decide what they will pay for the 10-year Treasury Note and the yield moves inversely.
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Without a direct influence, the Trump White House is at best left with indirect tactics, like a change in the Supplementary Leverage Ratio (SLR). This could result in banks buying more 10-years, which would in theory cause the price to rise and the yield to fall.
The SLR rule was part of the Basel III reforms in 2014 to improve bank stability, according to the Office of Financial Research.
Basel III was a response to the Global Financial Crisis “to ensure that banks maintained a minimum level of regulatory capital to absorb losses arising from movements in market prices of instruments held in the trading book,” as the Bank for International Settlements explains.
Banks under U.S. regulation are supposed to maintain an SLR of at least 3%, with the eight systemically important banks needing to maintain an SLR of at least 5%.
The banking industry has long wanted the SLR levels to be reduced, freeing up capital to be used in other ways. The Bank Policy Institute, a trade organization for large banks operating in the U.S., wrote in July 2024, “When a leverage ratio becomes the binding constraint on a bank’s capital allocation, it creates incentives that can distort a bank’s behavior and undermine the efficiency of risk-based requirements. For example, a binding leverage ratio disincentivizes banks to act as dealers in low-risk assets, such as U.S. Treasury securities. This is because such activities become relatively expensive in terms of capital under a leverage ratio view, despite their low risk.”
One theory is that regulators could review the SLR rule and reduce the requirements, allowing banks to invest at least part of the freed-up capital in 10-year notes. More demand for the 10-year should drive up prices, lowering yields.
Lower yields would potentially offer two benefits to the administration. One would be increased economic growth, with businesses and individuals more easily able to borrow and spend more. The other would be debt service cost reductions for the federal government.
A question is how much banks would want to invest in the 10-year and for how long. If yields started to drop, the returns might be less attractive to the banks. Also, if the yields became very low, banks bought at low yields, and then rates rose again, there could be a repeat of 2023 when some institutions saw the value of those assets suddenly tumble.
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