MW Why this banking proposal may mean good news for the bond market and investors

By Vivien Lou Chen

Easing leverage rules on banks has the potential to create stable, long-lasting demand for Treasurys, said Thomas Graff, chief investment officer at Facet

U.S. regulators took their first concrete steps on Wednesday toward deregulating banks in a way that is seen as likely to have big implications for the Treasury market, investors and the broader financial market - by potentially creating a source of stable, long-lasting demand for U.S. government debt. The Federal Reserve, along with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, unveiled a proposal to lower the amount of capital that the largest, most systemically important banks are required to hold against all assets, including Treasurys. The proposal would modify what's known as the enhanced supplementary leverage ratio, which currently sits at 5% for the eight biggest U.S. banks and at a minimum of 6% for their subsidiaries.

This move toward easing leverage rules, which have existed for more than a decade, is expected to free up the largest U.S. banks to own more U.S. government debt, incentivize them to substantially increase their purchases, and encourage them to act as intermediaries in the world's largest bond market. Lowering the SLR has been the centerpiece of Treasury Secretary Scott Bessent's plan to bring down long-term yields at a time when questions have been raised about the attractiveness of U.S. government debt and where demand at future bond auctions will come from. These questions have translated into volatile moves in long-dated Treasury yields this year.

President Donald Trump's tax-cut and pro-growth policies, contained in what he dubs the "One Big Beautiful Bill," are projected by the non-partisan Congressional Budget Office to increase the U.S. deficit by almost $2.8 trillion between 2025 and 2034 - raising the risk that there may be too much supply of government debt, but not enough buyers going forward. A key issue still remains as to whether the government will need to lean more on issuing short-dated Treasury bills than longer-duration maturities. "If there is some relief given to banks on the supplementary leverage ratio, that allows them to buy more Treasurys, and bonds would become more attractive to them - which is just a fancy way of saying there will be new demand for U.S. government debt," said Thomas Graff, chief investment officer at Baltimore-based Facet, which has roughly $4.3 billion in assets under management. "All the volatility that we've seen in the bond market over the last few months reflects worries that there won't be enough demand for Treasurys," Graff said via phone on Wednesday. Reducing the SLR alone "isn't going to be enough to offset the supply we're expecting to see." But if a lower SLR is implemented, greater demand from banks is likely to be seen at both Treasury auctions and the secondary market, where investors buy and sell previously issued government debt, he said. It's not clear exactly how long it will take to fully implement an SLR change since the proposal in its current form was just announced on Wednesday, and will be followed by a meeting of the Fed board in Washington starting at 2 p.m. Eastern time. Still, the proposed change has been widely expected since at least March, when Bessent talked about it during a speech before the Economic Club of New York and said the SLR "can risk becoming a binding constraint, instead of a backstop."First introduced in 2014 as part of the Basel III reforms put into place after the 2008 financial crisis, the supplementary leverage ratio has both its advocates and detractors.Supporters of the SLR have argued that it helps preserve the resiliency of the most important banks. The eight U.S. banks designated as being of global systemic importance are: Bank of America $(BAC)$, Bank of New York Mellon $(BK)$, Citigroup $(C)$, Goldman Sachs $(GS)$, JPMorgan Chase $(JPM)$, Morgan Stanley $(MS)$, State Street $(STT)$, and Wells Fargo $(WFC)$.

However, detractors like Fed Gov. Michael Barr said that the basket of proposed changes announced on Wednesday "unnecessarily and significantly reduces bank-level capital by $210 billion for global systemically important banking organizations," and "would significantly increase the risk that a GSIB bank would fail."

Others simply question whether an easing of the requirement will move the needle significantly when it comes to Treasury demand.

SLR reform "is no silver bullet," said Michael Brown, a senior research strategist at Pepperstone.

"Just because banks can increase their Treasury holdings, it doesn't necessarily mean that they will want to," Brown said in a note on Wednesday. "In order for banks to be convinced that they should be increasing their holdings, they don't just need SLR reform, but also to be sure (or at least have a solid expectation), that long-end rates will decline over the medium term."On the other side of the debate, detractors of the SLR have said that lowering the ratio should free banks up to engage in more profitable activities, like lending - which would, in turn, bolster their share prices.

Lowering the SLR is "something Scott Bessent talked a lot about during the transition [of the Trump administration] and early days of the administration," which fueled a lot of Treasury buying by hedge funds earlier this year before the tariff issue came along, according to Graff.U.S. debt is "going to keep growing over the next several years and anything that creates natural demand for Treasurys that's stable and lasts a long time is definitely a big deal," he added.

-Vivien Lou Chen

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June 25, 2025 13:40 ET (17:40 GMT)

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