Fed announces additional leverage relief measures yields on US bonds maturing at the end of March jump and bank weights fall

Just before the start of trading on Friday, the Federal Reserve suddenly announced that the closely watched replenishment leverage (SLR) relief would end on March 31, as previously stipulated in the previous policy. At this point, Powell "avoided talking" at the press conference on Wednesday that the reason for extending the SLR measure was revealed: the Federal Reserve does not intend to renew this policy.

Supplementary leverage ratio ((SLR)) is one of the indicators of capital adequacy ratio of commercial banks. At the beginning of last year, as the rapid escalation of the epidemic in the United States led to a sell-off in the bond market, the Federal Reserve temporarily relaxed rules to allow deposit institutions to exclude US debt and reserves when calculating SLR, which is also widely seen as the key to stabilizing sentiment in the Treasury market.

With regard to the decision to stop relaxing SLR at the expiration of its term, the Fed explained that due to the recent increase in the supply of central bank reserves and the issuance of Treasury bills, the Fed may need to address the current design and calibration of SLR to prevent the development of pressure that will both limit economic growth and destabilize finance.

As a result, US bond yields jumped and 10-year US bond yields rose again to 1.75 per cent. Bank stocks most affected by the policy fell after the opening of the three major indices. As of press time, mo fell 3.18 per cent, mo Genstein fell 2.47 per cent, Goldman Sachs fell 1.72 per cent, Bank of America fell 3.18 per cent, Hua Flag Group fell 2.57 per cent, and Wells Fargo fell 2.99 per cent.

Fed officials have previously said that banks are in such a good capital position that they do not need to sell treasury bonds to meet their capital needs even without SLR exemptions. The largest banks have about $1, 000bn in capital, and the removal of SLR relief would have little impact on that level.

But Michael Schumacher, an interest rate strategist at Wells Fargo, said it was a surprise for banks, as evidenced by the market reaction. Earlier, there were also some views in the market that if the Fed were to end this policy, it could not be given just 12 days.

At the same time, some "smart money" have staged the "run fast" Wall Street golden rule in advance. Primary dealers' holdings of Treasuries fell by $16.1 billion as of March 10, according to data released by the Federal Reserve on Thursday. Factoring in the $64.7 billion reduction in holdings the previous week, total primary dealer holdings have fallen to their lowest level since October 2018.

The Fed also said in a statement that it would collect market views on changes to SLR in the short term and take appropriate action to ensure that any changes to SLR do not damage the overall soundness of banks' capital requirements.