It’s almost as if the Biden administration and some of the most progressive Democrats out there, want the market to crash.
As a reminder to readers, the biggest reason why yields surged yesterday during Powell’s pow-wow is because the Fed chair refused to address the topic everyone has been obsessing over, namely what will be the fate of the SLR exemption which expires at the end of the month and which, unless renewed, will lead to dramatic balance sheet shrinkage across US banks leading to a violent deleveraging as banks are forced to dump bonds accelerating what is already a violent selloff in rates (read our full discussion on the SLR in “Why The SLR Is All That Matters For Markets Right Now“).
So, adding even more fuel to the fire, overnight Politico reported that the FDIC Chair Jelena McWilliams said it doesn’t seem like banking agencies need to extend an emergency move that made it cheaper for insured depository institutions to hold cash and U.S. government bonds on their balance sheets. The most important question rests with the Federal Reserve, she said.
“That’s because capital requirements for the parent holding company, which is regulated by the Fed, are more important for determining how expensive it is for those banks to hold Treasuries, she said.”
As a further reminder, late last week, Senators Elizabeth Warren and Sherrod Brown urged U.S. regulators to reject lenders’ appeals to extend the SLR exemption. In a joint letter to the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, the Democratic Duo argued that the banking industry is taking advantage of the coronavirus crisis to “weaken one of the most important post-crisis regulatory reforms.” Warren of Massachusetts and Ohio’s Brown, who took over the Senate Banking Committee this year, said granting the extension would be a “grave error.”
As we said in response, perhaps that would indeed be a grave error “but a bond market crash and deeply negative short-term yields would be a far more grave error, especially to the Democrats who are demanding that the Fed monetize trillions in debt in 2021 to fund Biden’s trillions in fiscal stimulus bills, something the Fed would not be able to do if the SLR exemption was not indefinitely extended.”
In other words, for whatever reason – and it certainly may be because they simply have no idea how dire the consequences would be, it now appears that there is a full-court press by the administration and Democrat politicians to not renew the SLR and unless the Fed steps in and overrides this, brace for impact as banks will have no choice but to dump tens of billions of holdings into the open market sparking the next full-blown crash as first yields soar and then all high-duration stocks, i.e., growth names, crater.
