US Banks’ Appetite for T-Bills Not Waning After Fed Ends Regulatory Relief

NEW YORK, April 26 (Reuters) – US banks’ demand for treasury securities has not abated, as expected, since the Federal Reserve allowed a waiver of capital adequacy regulations granted to the US government to expire. start of the pandemic, even as companies seek to raise more capital through debt issuance instead.

This should prevent spikes in US Treasury yields and keep them within a narrow range this year.

The waiver of the additional leverage ratio expired on March 31. This means that the big banks, since April 1, have resumed holding more capital absorbing losses against US Treasuries and central bank deposits.

The Fed has also said it will undertake a formal review of the SLR, fearing it will no longer work as expected with the central bank’s COVID-19 monetary policy measures.

“When we were all talking about the SLR a few months ago, we were concerned that the exemptions would expire… and that the banks would sell treasury bills, but the SLR (exemption) was gone and we didn’t really see any significant sales pressure. Said Dan Krieter, interest rate strategist at BMO Capital in Chicago.

Along with other investors, some bank purchases have pushed Treasury prices higher since the start of the month, pushing US 10-year yields down about 20 basis points. They were last at 1.572%.

Instead of selling Treasuries to meet capital ratios, analysts said the banks were issuing debt. By issuing debt, a bank raises capital on its assets, thereby increasing capital ratios.

Bank issuers are stepping up to take advantage of low cost of capital with a forward look amid potentially higher rates and borrowing costs, said Lyn Graham-Taylor, senior rate strategist at Rabobank in London .

JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley have issued or plan to issue a total of $ 40 billion in debt, according to media reports.

JPMorgan’s $ 13 billion bond sale on April 15 was briefly an industry record until it was surpassed the next day by Bank of America’s $ 15 billion offer.

“The Fed also hinted strongly at a permanent adjustment to the SLR calculations which likely prevented any significant selling of Treasuries,” BMO’s Krieter said.

The latest data from the Fed on the holdings of major traders of Treasuries, a component of banks’ holding of U.S. government debt, showed a slight increase in their stocks of Treasuries as of April 14, to 125 , $ 6 billion, compared to the previous week.

Primary traders’ holdings fell from late February to mid-March as banks prepared for the expiration of the SLR exemption, the data showed.

U.S. banks currently hold between 8% and 10% of publicly available treasury securities, according to data from the Fed. This is a big chunk that could shift yields if there are reallocations away from Treasuries.

In April 2020, the Fed excluded Treasuries and central bank deposits from the leverage ratio until March 31, a move to ease tensions in the Treasury market and encourage banks to lend.

“From what I understood, not many banks were using the SLR exemption on their Treasury holdings anyway,” said Patrick Leary, chief market strategist and senior trader at brokerage Incapital.


Issuing debt is much more beneficial to banks than selling Treasuries, analysts said, although it could cost them money.

“Funding a portfolio of bank reserves and treasury bills with unsecured bank debt is likely a negative arbitrage proposition,” BMO’s Krieter said. “Interest on reserves doesn’t earn much and it earns less than what you pay for the debt that finances it.”

But Krieter noted that selling treasury bills was a much more expensive exercise than issuing debt.

“To maintain a certain SLR, you can sell treasury bills and then buy them back presumably at a higher market price once the permanent exemption comes in,” Krieter said.

“In this example, you are paying the full bid / ask spread on a Treasury portfolio worth tens of billions of dollars.” (Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Dan Grebler)

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