SLR: Could It End The Bond Bear Market

The Federal Reserve has quietly announced a significant change to the Supplementary Leverage Ratio (SLR), which could have a profound impact on the US Treasury market. The SLR was initially implemented to limit the amount of leverage banks could take on, but it has been recalibrated to reflect a more nuanced risk-based approach. This change could unlock between $5.5 and $7.2 trillion in bank balance sheet capacity, equivalent to roughly 25% of GDP. The largest US banks, including JP Morgan, Bank of America, Wells Fargo, and Citigroup, stand to benefit the most from this change. The increased balance sheet capacity could lead to increased repo financing and direct Treasury purchases, particularly during periods of market dislocation. This could create demand for Treasuries, improve market liquidity, and push yields lower, which could be beneficial for the economy. The change could also reduce the risk of another episode like the September 2019 repo blow-up or the March 2020 liquidity crisis. Investors should prepare for downward pressure on long-term yields, especially during risk-off periods when the bid for safety intensifies. The substantial short position against US Treasury bonds could amplify the downward pressure if an event forces a rapid unwind. Overall, the Fed's proposed SLR reforms are a targeted effort to shore up the financial plumbing of the Treasury and repo markets.