Weekly Market Pulse: Much Ado About Not Much

The SLR exemption is ending! The SLR exemption is ending!

Doesn’t exactly roll off the tongue, does it? There has been rampant speculation the last few weeks about the fate of the exemption the Fed provided banks a year ago with regard to the Supplemental Leverage Ratio that allowed them to ignore Treasuries and reserves. The banks themselves warned that allowing the exemption to expire might unleash all manner of nasty economic side effects. Why, how in the world could they lend with all these Treasuries and reserves eating up capital? Elizabeth Warren warned that we shouldn’t let the banks sidestep this oh-so-important improvement of bank regulation that had sprung from the ashes of the 2008 financial crisis. The usual stock market bears were sure it would finally vindicate them and push stocks down if Jerome Powell somehow found the courage to defy the banking lobby.

And so, last week Jerome Powell, announced that the Fed would allow the exemption to lapse on schedule. And…nothing much happened. Well, I suppose that isn’t exactly true or may not be. Treasuries did sell off again last week, the 10-year nominal Treasury and the 10-year TIPS yields hitting new highs (which are still pretty darn low) for the post-virus crisis period. I mean, my goodness, the nominal 10-year yield shot up 10 basis points in one week! Dear Lord, will the carnage never end??? And TIPS?? Well, ok, TIPS barely moved but they could have!

At Alhambra we noted the debate over the SLR a few weeks ago but mostly because clients and readers asked us to comment. The fact is that the banks have plenty of capital and they aren’t exactly slugging it out to lend to Joe Public anyway. Even if the SLR is fully enforced it won’t mean much for the market or the economy. Yes, there had been some selling in the Treasury market ahead of the decision but that is not exactly news. The downtrend in bonds is now 8 months old so if you’re still in long-term Treasuries and taking weekly losses, don’t blame Jerome Powell. I do not expect banks to change anything in response to the expiration of the SLR exemption.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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