Plumbing Notes: A Faulty Relief Valve
why the Fed's SLR rework won't be the major booster of UST demand
The suppression of short-end volatility continues, with the U.S. central bank set to announce at least one type of routine UST (U.S. Treasury) bill operations. Fed officials are set to unveil their first bill purchase schedule on December 11th. Bill buying designed to preserve interbank liquidity, a.k.a RMOs (reserve management operations), should arrive a month or so later, perhaps following more imminent “ceiling management operations” (CMOs): an extra add-on of reserve injections that enables the Fed to hold money market rates well within its target band1.
Market participants believe in the Fed & Treasury’s efforts to calm the short end, much like interventions across the rest of the curve. Treasury buybacks, deferred increases in duration (i.e. note and bond) issuance, and the U.S. Empire continuing to avoid fiscal dominance have placed a cap on yields. Yet, their latest incoming alchemy, the rework of a key regulatory ratio that banks can adopt as early as Q1 2026, may not deliver the “juice” leaders envision. The Fed’s Relief Valve, a reduction of its tough SLR (supplementary leverage ratio) — a ratio that requires banks to hold extra capital whenever they expand their balance sheets — will only be partially opened.
As expected, despite calls for greater balance sheet relief for the largest market makers in U.S. sovereign debt, the U.S. regulatory complex has opted to implement the least influential change to the SLR, choosing to deliver only tiny incentives for banks to acquire and absorb more USTs.