Bessent has a plan to bring down long-term yields. But will it work?

U.S. Treasury Secretary Scott Bessent has an idea in mind that he says should help to bring down long-term Treasury yields, which act as a benchmark for interest rates. But one big question remains: Will it work?

The plan is to soon lower the supplementary leverage ratio for banks, which should theoretically allow them to hold more U.S. government debt, lend more freely or both. The SLR, established in 2014, is aimed at ensuring that banks have sufficient capital to absorb losses, particularly during periods of stress, and requires them to hold a specific amount of high-quality capital relative to their total leverage exposure.

A potential revamp of the SLR — which has been talked about for months — has already gained support from the banking sector. It came to the fore during an interview with Bloomberg Television last Friday, when Bessent said: “I think we are very close to moving the supplementary leverage ratio, SLR. That is moving along very quickly between the three banking regulators,” referring to the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. “So I would think we could see something on that over the summer.”

Uncertainties over the Trump administration’s tariff policies have raised questions about investors’ willingness to keep buying U.S. government debt and where future marginal buyers will come from. This, in turn, has led to a recent bond-market selloff, which drove the 30-year Treasury yield 

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4.950%

 to almost 5.09% last Wednesday — the highest level since Oct. 25, 2023, according to 3 p.m. Eastern time figures. The narrow passage of President Donald Trump’s tax and spending megabill in the House of Representatives last Thursday, which moved the package to the Senate, has only added to worries about the U.S. fiscal outlook.

Lowering the SLR could play into Trump’s overall agenda by potentially freeing up banks to do more lending, persuading them to add more Treasurys to their balance sheets or both, as well as by reducing long-term borrowing costs for businesses and households and stimulating economic growth. In February, the administration pledged to focus on containing long-term Treasury yields, which gave rise to speculation among traders that the SLR rules would be reviewed.

For the eight U.S. globally systemic important banks, which are subject to an enhanced SLR, the ratio is effectively at least 5%. For other banks, the SLR is at least 3%.

When Bessent was asked by Bloomberg if lowering the ratio could have a significant material effect on Treasury yields, he replied: “Well, I think it could, because banks are being penalized for holding Treasurys, as there’s a large supplementary leverage charge. So I think for holding the risk-free asset, we can reduce that. And, you know, I’ve seen estimates that we could bring yields down by tens of basis points. Certainly, during the COVID crisis, it was temporarily taken off, and it had a big effect.”

But others are not so sure.

In a note released on Tuesday, Peter Boockvar, chief investment officer at the Bleakley Advisory Group and author of the Boock Report newsletter, cast doubt on Bessent’s claim, saying the Treasury secretary “might be too optimistic.”

Among other things, Boockvar pointed out that a lower SLR may not turn banks into more active traders of Treasurys. If this is the case, then “the Fed will have to intermediate, which I think is just a bad policy idea. Every time there’s a kerfuffle in the markets, the Fed has to come in and intermediate,” he said.

Boockvar also said banks may not be looking to add to their Treasury holdings. But even if they were, memories remain fresh of the 2023 collapse of Silicon Valley Bank, which had an investment portfolio heavily concentrated in long-dated Treasurys.

For those banks that will increase their holdings of Treasurys going forward, “the experience of Silicon Valley Bank would most likely mean they would be buying T-bills rather than adding much duration,” Boockvar said. “I thus think the long end of the U.S. yield curve is going to have to find other help.”

https://www.marketwatch.com/story/treasury-secretary-bessent-has-a-plan-to-bring-down-long-term-yields-but-will-it-work-bbe73dfe