The Trump administration is betting that a tweak in banking regulations could finally bring down the stubbornly high yield on the 10-year Treasury Note—a financial benchmark that has dogged the White House since day one. Since January, yields on the 10-year have hovered between 4.3% and 4.5%, making it more expensive for the U.S. government to borrow and keeping long-term interest rates, including those for commercial real estate mortgages, elevated.
President Trump and Treasury Secretary Scott Bessett have made it clear they want to lower those yields, but the challenge is that, unlike short-term rates influenced by the Federal Reserve, long-term ones are set by the bond market. Investors determine what they are willing to pay for the 10-year Treasury Note and yields move inversely to price.
To tip the scales, the administration is looking to encourage banks to buy more long-term Treasurys. The plan centers on adjusting the Supplementary Leverage Ratio (SLR)—a rule that requires banks to hold reserves equal to at least 3% of their assets, including Treasurys. For the nation’s eight largest banks, the requirement is even higher, at 5%, due to the “enhanced supplementary leverage ratio.” Banks have long pushed back against these requirements, arguing that they tie up capital that could be used elsewhere, even for assets as safe as Treasurys.
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Yet, details on how the administration might change the SLR remain unclear, and there is skepticism about whether the move will actually achieve its goal. According to Reuters, the Federal Reserve is expected to review banking regulations this week, with a potential change to the SLR on the agenda. Regulators are reportedly weighing whether to reduce the enhanced SLR by up to 150 basis points or to exempt Treasurys from the requirement altogether, given their safety and liquidity.
Some experts are unconvinced that lowering the SLR alone will have the desired impact. “Lowering the capital requirements instead of a Treasury carve-out from the SLR is a weaker form of regulatory easing, and in my view, it doesn’t fully address the constraint dealers face during intense market stress,” Deutsche Bank U.S. rates strategist Steven Zeng told Reuters. He added, “I still think a full carve-out is the most effective way to bolster market liquidity and compress the spread between Treasuries and swaps, but understandably, it’s also a significant jump for Fed regulators.”
Analysts at BMO Capital Markets echoed this skepticism, telling Reuters, “We’re skeptical that lowering SLR will trigger a massive round of buying in U.S. Treasuries from major U.S. banks.”
As the administration weighs its options, the financial world is watching closely to see whether this regulatory gambit will finally move the needle on the 10-year yield—or if it will remain an unsolved problem for the White House.
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