SLR Expiry sends yield tentatively higher, stocks mixed

Risk appetite got hit with an early one-two punch after Secretary of State Blinken took a hardline approach with his first meeting with China and with the Fed’s decision to end a pandemic emergency program for banks.  Quadruple witching will also add to today’s volatile session.  The Nasdaq is positive in early trade, while the Dow and S&P 500 index are paring earlier losses. 

SLR

Treasury yields spiked after the Fed decided to not extend capital relief to the largest banks.  The Supplemental Leverage Ratio will expire at the end of the month, a decision that surprised many and seemed premature.

The big fear is that some banks might resist lending because they might struggle putting more capital aside.  Banks appear to be healthy, with $3.5 trillion in reserves and should be able to handle permanent changes to SLR.    

Fed policymakers were concerned that expiration of the SLR exemption would trigger banks to stop buying Treasuries or accepting deposits which would send cash into the money markets.  Some analysts were convinced the ending of the SLR exemption will wreak havoc in the repo markets.  Repo financing however should see little impact on the Fed’s decision to let the SLR expire because repos were not exempt at the holding company. 

Wall Street is closely going to follow the upcoming Treasury auctions and if bank interest is low, the bond market selloff could intensify. 

The Fed’s decision to let the capital relief exemption to banks expire at the end of the month sent financials sharply lower and reminded investors that the current economic recovery warrants the phasing out of pandemic-era programs. 

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