Hello, everyone! A new week has begun, and time seems to move differently between holidays and weekdays. Let’s shift into work mode and explore whether President Trump and Treasury Secretary Scott Bessent can lower the U.S. 10-year Treasury yield (hereafter 10-year yield).
The 2008 Crisis and the Rise of SLR Regulation
The 2008 financial crisis exposed liquidity risks in financial institutions. U.S. lawmakers determined that holding excessive assets relative to capital was the root cause. In 2010, the Dodd-Frank Act introduced the SLR regulation (Supplementary Leverage Ratio), restricting the ratio of Tier 1 capital to total exposure.
Deposit-taking financial institutions had to maintain at least 3%, while systemically important banks (G-SIBs, with assets over $250 billion) needed 6% or more. This ensured financial institutions either built sufficient capital or avoided over-leveraging.
2008 financial crisis
COVID-19 and SLR Relief
In 2020, COVID-19 reduced demand for U.S. Treasuries. To stabilize prices, financial institutions needed to buy, but SLR regulation was an obstacle. In April 2020, the U.S. excluded Treasuries from the SLR denominator temporarily.
This allowed financial institutions to buy more Treasuries without impacting SLR ratios, with smaller banks leading the charge. It helped stabilize the 10-year yield, but problems emerged three years later.
COVID-19 & financial impact
Bond Basics and Interest Rate Effects
A bond is a debt instrument, like an IOU, but tradable. The challenge is pricing. Imagine buying a 10 million KRW bond with 2% interest, payable in a year with principal. At maturity, you’d get 10 million KRW plus 200,000 KRW interest.
If you sell after six months, you’d want more than 10 million KRW since waiting yields 200,000 KRW. Buyers, knowing they’ll earn 200,000 KRW in six months, might pay around 10.1 million KRW. But if new bond rates rise to 10%, a new bond yields 500,000 KRW in six months, making the 2% bond (100,000 KRW) less valuable—sold at around 9.6 million KRW. Higher market rates lower old bond prices; lower rates raise them. Long-term bonds (5, 10, 30 years) amplify this effect.
SVB Collapse and Rate Hikes
Silicon Valley Bank (SVB) held low-yield, long-term Treasuries as held-to-maturity (HTM), avoiding price fluctuation accounting. Fed rate hikes slashed their value, creating unrealized losses. SVB used only 31% of deposits for loans, parking 46% in Treasuries and MBS.
When withdrawals surged, liquidity dried up. Selling HTM Treasuries locked in a $1.8 billion loss, sparking a bank run. In two days, $48 billion in deposits vanished, and SVB collapsed.
SVB’s downfall
Fed and Treasury Response
Post-SVB, the Fed and Treasury faced three tasks:
- Prevent startup and venture firm failures (95% of SVB clients lacked deposit protection).
- Stop bank run contagion.
- Prevent financial institutions from dumping Treasuries.
The government guaranteed deposits over $250,000, solving the first two. The Fed’s BTFP offered loans against Treasuries and MBS at face value, not market value, stabilizing the 10-year yield.
Trump and Bessent’s Plan
In 2025, Trump and Scott Bessent target the 10-year yield. Bessent said, “Trump and I are focused on the 10-year yield.” Reducing issuance or boosting demand can lower yields, but fiscal deficits make cuts unlikely.
On January 30, 2025, Trump said, “The Fed’s regulations are terrible. The Treasury will cut unnecessary rules,” hinting at easing SLR regulation. Like 2020, this could spur financial institutions to buy Treasuries, lowering the 10-year yield.
Tariff Policy and Deregulation
Trump may use tariff policy to boost Treasury demand, pausing tariffs if nations buy more U.S. debt. Meanwhile, Fed Vice Chair Michael Barr’s resignation on February 28, 2025, clears the way for an SLR regulation-friendly successor.
Trump speech
Can They Succeed?
Trump and Bessent combine SLR regulation easing and tariff policy to lower the 10-year yield. Success depends on:
- Financial institutions’ willingness: SVB’s fate may deter buying.
- Global response: Tariff policy sparking trade wars could raise yields.
- Market trust: Deregulation fears might push investors away.
In one line: “Trump and the Treasury Secretary prioritize the 10-year yield, using tariff policy pauses to spur global buying and SLR regulation easing to boost financial institutions’ holdings.” What’s your take?