September 19, 2021

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Mortgage News

Another Chance to Find The Ceiling; What is SLR?

Last week ended badly for the bond market and yields rose to new year highs. It was also the first full week of 10-year yields trading above 2019’s low yield of 1.44%. Despite breaking the 1.62% cap, yields stayed pretty close and will stay close as the new week begins (1.614% at 9 a.m.).

This leaves us in the familiar position of “still trying” set / confirm an upper limit“Following the sales trend that started last August and accelerated abruptly in 2021. 1.62 still has a chance (although it should be labeled 1.62-ish at this point), but quite a few traders have tossed numbers like 1.75% around. The odds would improve dramatically as yields approach 1.95%, both due to the nearby psychological barrier at 2% and its role as a critical fulcrum in late 2019.

This “pivot point” behavior (in summer 2020 as a floor, then in November / December as a permanent upper limit) is the reason for this 1.95% is part of the “hitch” zone– the range of returns that most likely included the next big increase in the cap.

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If bonds hope to find that cap in the lower part of this range, traders will almost certainly have to see the Fed extending its temporary term SLR (Supplemental Leverage Ratio) Rules for large banks. These rules went into effect on April 1, 2020 and allow major banks to do so buy more treasuries (by not counting Treasuries against bank leverage ratios – essentially a cap on lending / bond purchases).

The program is Expire in 2 weeks. There is widespread speculation (but no certainty) that the Fed will extend it. In any case, it is sure to come up in the press conference following the Fed’s announcement this week. It could even be officially announced on Wednesday afternoon at 2 p.m. The bond market is likely to have a little bit to do or sell, depending on the outcome. To be clear, if the Fed formally extends the SLR exemption, bonds are more likely to do so rally. If Powell is asked about this and downplays renewal options, then it is likely that Bonds will Clearance sale.