Is Treasury Issuance an Emergency?

March 30, 2024

A Fed paper from June 29, 2023 is entitled ‘Impact of Leverage Ratio Relief Announcement and Expiry on Bank Stock Prices’.  That’s one of the google results when I searched for information on the March 5, 2024 ISDA letter requesting agencies (starting with the Fed) to “…revise the SLR to permanently exclude on-balance sheet US Treasuries from total leverage exposure.” (SLR is Supplementary Leverage Ratio)

I only became aware of this ISDA request because I listened to the most recent MacroVoices podcast featuring Luke Gromen (thanks DK).  I searched for more information but the search didn’t really turn up much, though I am sure it was addressed (without bias) in papers by bank research depts.

From the June 29, 2023 Fed Note:

On April 1, 2020, as part of these efforts, the Federal Reserve announced an interim final rule, set to expire on March 31, 2021, that would temporarily exclude U.S. Treasuries and deposits at Federal Reserve Banks from the calculation of the Supplementary Leverage Ratio (SLR). One of the main goals of this interim rule was to ease strains in the Treasury market resulting from the coronavirus and increase banking organizations’ ability to provide credit to households and businesses.

Relief from the SLR regarding Treasuries was an EMERGENCY measure.

Now here are a couple of excerpts from the March 5, 2024 ISDA request: (ISDA is Internat’l Swaps and Derivatives Ass’n)

A permanent exclusion would better promote the stability and resilience of the U.S. Treasury market than the current framework, which has required adjustments during periods of significant market stress. More broadly, an exclusion would help support market liquidity in the context of projected increases in the size of the U.S. Treasury market and the importance of bank participation in the market.

An exclusion for U.S. Treasuries from the SLR and GSIB surcharge would provide more capacity for banks to expand their balance sheets and provide liquidity during times of stress. There are significant benefits to bank participation in these markets given that banks are highly capitalized, have sophisticated risk management processes and are subject to comprehensive prudential regulation and supervision. [page 7]


Here’s how I might summarize this request, using slightly different language.

The Federal Gov’t is spending like a drunken sailor.  You know it, I know it. The risk is that a high degree of market stress will ensue if debt associated with spending can’t be absorbed.  As the biggest banks, we know this request is basically a subsidy…now that deposits have flowed into G-SIBs from risky regional banks we can fund the debt with positive carry – if we don’t have the SLR weighing us down.  We added the bullshit line about macroprudential oversight as cover, everyone knows the regional bank crisis was partially the result of failed supervision.  Sure, this exemption will benefit G-SIBS… and maybe as the Commercial Real Estate bubble drags down a few more regionals we can gracefully absorb them given the extra capital we’ll be generating.  You help us, we’ll help you.

There’s the proposal.  It’s not exactly bending down on one knee.  More like a threat.  What if treasury yields scream back to October’s highs (or higher) before the election?  What would happen to stocks?  Where would mortgage rates be?  How would that impact the election?

Note that there’s another Fed paper from August 2023 examining Dealer’s Treasury Market Intermediation and the Supplementary Leverage Ratio.  It concludes:

Overall, our inspection during the temporary exclusions of Treasury securities and reserves from TLE between April 2020 and March 2021 does not show a noticeable effect on the big six dealers’ Treasury intermediation, including direct holdings of Treasuries and SFTs backed by Treasuries.

We’ll ignore that conclusion.


The PCE price data came in essentially at expectations with Core Deflator +0.3 MoM and 2.8% YoY though there was a slight revision higher for the previous month.

Powell on Friday: “…the decision to begin to reduce rates is a very, very important one because the risks are two sided.  If we reduce rates too soon there’s a chance that inflation would pop back… There’s also a risk that we would wait too long and …in that case it could be an unnecessary, unneeded damage to the economy and perhaps the labor market.”  [the dual mandate]

“The economy is strong. …growth around 2% this year… That means that we don’t need to be in a hurry to cut.”  [slightly softer than Waller’s comments]

By the way, what was the deal with interviewer Kai Ryssdal’s ‘Where’s Waldo’ socks?

Anyway, the  NY Fed Q1 Nowcast is 1.9%, and the Atlanta Fed’s GDPNow which was updated Friday is 2.3%. 

The Employment Report is Friday 5-April.  On Friday (March 29) ZeroHedge highlighted the Philly Fed quarterly report from March 14 showing substantial downward revisions in payrolls.

The only reason to mention the ZH post is that the Fed’s dual mandate is becoming more evenly balanced with respect to the Fed’s next move.  Powell speaks again on the economic outlook on Wednesday, April 3.

Just a few other calendar highlights
4/1 ISM Mfg
4/3 ISM Services
4/3  Governor Bowman (before Powell) on Bank Liquidity. She also speaks 4/2 re: Bank Mergers
4/3  Chair Powell
4/3  Governor Kugler on policy outlook
4/4  Richmond Fed Barkin on Econ Outlook
4/5  NFP

4/10 CPI & Fed minutes
4/11 PPI

SLR could be a topic for Bowman and might pop up in FOMC minutes

Curve flattened (became more inverted) last week on Waller’s comments, echoed by Powell on Friday.  However, 2/10 closed Thursday at -42.4, still above the low of the year of -45.4 on March 6.  Low from December of last year is -53.6.  Strong support -62 to -53.

UST 2Y455.3462.26.9
UST 5Y419.8421.11.3
UST 10Y421.6419.8-1.8
UST 30Y439.1434.3-4.8
GERM 2Y282.7284.82.1
GERM 10Y232.3229.8-2.5
JPN 20Y149.2145.2-4.0
CHINA 10Y230.9230.6-0.3
SOFR M4/M5-109.0-107.02.0
SOFR M5/M6-37.0-44.0-7.0
SOFR M6/M7-1.5-5.5-4.0
CRUDE (CLK4)80.6283.172.55

Posted on March 30, 2024 at 11:56 am by alexmanzara · Permalink
In: Eurodollar Options

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