How are energy investors positioned?
Anticipation grew in the financial markets over a potential review of the Supplementary Leverage Ratio (SLR), a regulatory requirement that mandates U.S. banks to hold additional capital against U.S. government debt and central bank deposits.
This comes in response to the Trump administration's focus on managing long-term U.S. Treasury yields, which has led some traders to bet on a forthcoming reevaluation of the SLRaccording to a Reuters report.
The possible policy shift, which would permit banks to hold less capital for safe assets like Treasuries, could result in lower U.S. Treasury yields by encouraging banks to increase their holdings of government debt, according to investors and analysts. Last week's statement by U.S. Treasury Secretary Scott Bessent regarding the administration's efforts to contain 10-year Treasury yields has further fueled these expectations.
The Bank Policy Institute (BPI), representing large U.S. banks, has recently argued that adjusting the SLR is essential to maintaining market functioning, especially in light of expected increases in government debt issuance due to significant budget deficits. BPI's executive vice president and head of research, Francisco Covas, expressed optimism that changes to the SLR could be implemented swiftly.
In the past week, swap spreads have widened, indicating investors' anticipation of a rule review. The 10-year and 30-year swap spreads have increased by about five and 10 basis points, respectively, reaching their widest points since June 2024 and December 2023.
Federal Reserve Chair Jerome Powell, addressing Congress this week, supported the idea of reducing the SLR to enhance liquidity in the Treasury market. Similarly, Fed Governor Michelle Bowman and FDIC Acting Chairman Travis Hill have acknowledged the need for adjustments to the SLR.
These discussions occur amidst broader efforts to improve liquidity in the Treasury market, including a December 2023 SEC rule mandating more trades through clearinghouses, set to phase in by June 2026.
Despite the potential benefits, Deutsche Bank (ETR:DBKGn) analysts have cautioned that changes to the SLR might only marginally reduce risk premiums and could carry some risks by potentially lowering the resilience of the banking system.
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