(Bloomberg) -- Treasury Secretary Scott Bessent said that US regulators this summer may ease a rule that’s served as a constraint on banks’ trading in the $29 trillion Treasuries market.
“We are very close to moving” on the so-called supplementary leverage ratio, Bessent said on Bloomberg Television’s Wall Street Week with David Westin. He noted the three main bank regulators — the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. — are addressing the issue.
Banks have argued the rule, which requires them to hold capital when they trade against their investments in Treasuries, crimps their ability to add to those securities in stressful times, as they are treated in line with much riskier assets. Loosening the rule would encourage them to boost holdings, some market participants say. Bessent cited estimates that tweaking it could reduce US Treasury yields by tens of basis points.
“I think we could see something on that over the summer,” Bessent said of changing the SLR. In a wide-ranging interview, the Treasury secretary also played down concerns about the recent selloff in the bond market, and rejected the idea that the dollar is “weak” after recent declines. He predicted the Republican tax bill now heading to the Senate would help boost US economic growth toward 3% next year, assuaging concerns about government debt.
After Bessent’s SLR remarks, a popular hedge-fund bet that Treasuries will perform better than interest-rate swaps took a slight leg up. The wager, which had been shaken this week by a surge in long-dated yields, has hinged on a potential move by the Trump administration toward adjusting the SLR. Thirty-year US yields were trading at about 5.02%, with the spread against comparable-maturity SOFR swaps climbing by about two basis points on Bessent’s timing guidance.
“‘We can see more bond buying by US citizens, US institutions,” he said.
The Treasury chief was speaking at the end of another down week for US Treasuries, which has seen yields on benchmark 10-year notes climb above 4.5% and 30-year ones surpass 5%. The selloff deepened on Wednesday in the wake of an auction of 20-year government bonds that saw tepid demand, stoking anew concerns about the scale of debt that the Treasury must sell thanks to the gaping fiscal deficit.
“I’m not particularly worried about what the market is saying,” Bessent said. Increased government bond yields have “been a global phenomenon” he said, citing higher rates in Japan, Germany and the UK as well.
He disputed commentary that the recent rise in Treasuries yields was prompted by concerns about the Republican tax bill and projections it will worsen the US debt ratio compared with gross domestic product.
“This bill is going to create growth,” which will shrink the debt ratio, he said. “I’m not worried about the US debt dynamics, because a change in the growth trajectory takes care of a lot of that,” he said, predicting that “by this time next year we will be north of 3” in terms of the GDP growth rate.
As for moves in the foreign exchange market, he said “I wouldn’t necessarily categorize them as a weak dollar.” There’s been a reaction to economic policy moves in Germany and Japan, he said. “So I think a lot of this is other countries’ currencies strengthening, as opposed to the dollar weakening.”
Foreign Buying
The Bloomberg Dollar Spot Index hit its weakest level since December 2023 on Friday, after President Donald Trump threatened a sweeping 50% tariff on the European Union.
Bessent also said that figures he’s seen show that overseas demand for Treasuries remains strong.
“I have access to the data, and we’ve actually been seeing foreign national entities — whether it’s reserve managers, sovereign wealth funds or pension funds — have been buying more Treasuries in the latest auctions,” he said.
As for banks’ demand for Treasuries, executives have offered differing perspectives on the impact of SLR relief. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last month said that for his bank, just changing the SLR wouldn’t make a big difference, citing several other capital and liquidity rules that he believes need reform.
‘Important’ Reform
By contrast, Goldman Sachs Group Inc. CEO David Solomon said last month that “SLR relief would have a benefit to Treasury markets,” and that “it’s an important structural reform.”
The SLR doesn’t have risk weightings for assets — meaning it applies evenly to US government debt, which is widely regarded as the benchmark asset for the global financial system.
The SLR’s applicability to Treasuries was suspended during the Covid crisis, but it’s since been reinstated. Bessent and Federal Reserve Chair Jerome Powell have previously expressed support for tweaking the rule. Bessent said Friday that “it had a big effect” when the SLR was temporarily taken off during the pandemic.
While the change may give banks greater appetite for Treasury bonds, it’s unlikely to have a large impact on their overall capital requirements, because they also face risk-weighted rules and annual stress tests that help set minimum capital levels.
--With assistance from Sydney Maki and Michael J. Moore.
(Updates with further comments on markets, starting in fourth paragraph.)
