© Reuters. FILE PHOTO: People wearing masks walk outside of the Federal Reserve Bank of New York in New York
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – US banks’ demand for Treasury securities has not declined, contrary to expectations, since the expiry of the Federal Reserve abandoned the capital adequacy regulation. issued early in the pandemic, even as companies seek to raise more capital through alternative issue debt.
That should prevent US Treasury yields from spiking and keep them in tight margins this year.
The additional leverage waiver expired on March 31st. That means that the major banks, since April 1, have continued to hold more loss absorbing capital than the Treasury. United States and central bank deposits.
The Fed also said it will conduct a formal review of the SLR due to concerns that it is no longer working as expected with the central bank’s COVID-19 monetary policy measures.
“When we all talked about SLR a few months ago, we were worried that exemptions would expire … and banks would sell the Treasury, but the SLR (waiver) was gone and we were. “Not really seeing significant sales,” said Dan Krieter, interest rate strategist at BMO Capital in Chicago.
Along with other investors, a number of buying banks have raised Treasury prices since the beginning of the month, pushing US 10-year yields lower by about 20 basis points. They are last at 1,572%.
Instead of selling bonds to meet capital ratios, analysts say banks are issuing debt. By issuing debt, a bank increases its capital relative to its assets, increasing its ratio of capital.
Lyn Graham-Taylor, senior interest rate strategist at Rabobank in London, says bankers are jumping in to capitalize on low capital costs with a vision of the future in light of interest rates and costs going. loan may be higher.
JPMorgan Chase (NYSE :), Bank of America (NYSE :), Goldman Sachs (NYSE 🙂 and Morgan Stanley (NYSE 🙂 has or is planning to issue debt totaling $ 40 billion, according to media reports.
The brief sale of JPMorgan’s $ 13 billion bond on April 15 was an industry record until it topped out the next day by Bank of America’s $ 15 billion offering.
“The Fed has also made much of a reference to a permanent correction to SLR calculations likely to prevent any major Treasury sales,” said BMO’s Krieter.
The Fed’s latest data on major dealers’ Treasury holdings, a component of bank ownership to US government debt, shows their Treasury inventories as of April 14, to 125.6 billion USD, up slightly from a week earlier.
The holding rates of major agencies have declined from late February to mid-March as banks prepare for the SLR tax exemption expiration, the data shows.
According to Fed data, US banks currently hold between 8% -10% of the public treasury securities. That is a large portion of the yield that could move if there is reallocation away from the Treasury.
In April 2020, the Fed excluded the Treasury and central bank deposits from leverage until March 31, a move aimed at easing treasury market tensions and encouraging banks to lend. .
“To my knowledge, not many banks use SLR tax exemption on their holdings,” said Patrick Leary, market strategist and senior trader for Incapital broker-agent. their.
ISSUING LIABILITIES AND SALES
Analysts say issuing debt is much more profitable than selling Treasury, even though they could lose money in doing so.
“Financing the Bank and Treasury portfolio with unsecured bank debt could be a negative arbitrage proposition,” said BMO’s Krieter. “The gains on reserves don’t make much and they’re making less than you’re paying off the debt financing it.”
But Krieter notes that selling the Treasury is a much more expensive undertaking than issuing debt.
“In order to maintain a certain SLR, you can sell Treasury and then can redeem them at a higher market price with a permanent exemption,” says Krieter.
“In this example, you are paying the full bid / offer spread on a Tens of billions of dollars worth of Treasury portfolio.”