For the 17th time in 2021, we can unhappily re-use the same lead in: just when you thought bonds surely wouldn't get any weaker...  10yr yields hit more new long-term highs overnight (currently at 1.66%+, putting the 1.75% target--the one that seemed way too far away a few days ago--easily within reach of a negative Fed surprise).

Speaking of the Fed, that is obviously the focus today.  And it's a very abnormal Fed day due to the SLR issue.  If you're thinking to yourself "what the hell is this SLR business?!" you're not alone.  Read this if you haven't.  And for the other 80% of you that don't click links, SLR= supplemental leverage ratio.  It applies to big banks and limits the amount of their total assets devoted to lending (or owning bonds).  In April 2020, the Fed said banks could disregard Treasury holdings in that ratio.  That allowed banks to buy/own more Treasuries or to forego selling Treasuries, thus hopefully improving market functioning, policy transmission, and maybe even their stated goal of increasing lending to consumers.

What skeptical market watchers need to understand about that last part is that everything's relative.  Lending to consumers was always going to be crappy in 2020, yet the SLR change has come under fire as failing to stimulate lending.  The fact is you don't know if it did or it didn't because you can't compare 2020's numbers to an imaginary reality without the SLR tweak.  Maybe it would have been even worse.  In fact, it almost certainly would have been.  

Either way, and regardless of the stated purpose of the emergency/temporary change, the Treasury supply situation remains emergent--especially with the Fed's balance sheet under increasing scrutiny.  As such, even though covid is seemingly being defeated and the economy is lurching back to life, this "emergency" program could still be seen as useful.  So those are the two sides of the debate:

  • SLR extension is not needed or likely because the pandemic is dying down and banks didn't increase lending much anyway
  • SLR extension is very much needed because Treasury supply is rampant, the Fed needs all the help it can get, and it likely did increase lending relative to what it would have been without the SLR tweak.

The volatility is compounded by the uncertain timing of this information.  When the Fed initially released the official policy change on SLR, it happened at the end of the trading day on April 1st, 2020.  There was no Fed meeting that day.

The timing was understandable given that the Fed was in the midst of unleashing a barrage of accommodation to combat a serious breakdown in smooth market functioning and liquidity.  

All that to say, the Fed may announce an SLR extension before or after today's scheduled Fed events.  The longer we go without seeing it, the more bonds worry.  If we hit 2pm ET with no SLR press release, it will be up to Powell to comment on it.  If Powell says nothing about it, or if he is questioned on it and abstains (or indicates it's not likely to be extended), then 1.75% REALLY won't seem like it's too far away.