Treasury market shows fragility signs
- Bank groups led by SIFMA pressed for changes to the Fed’s big-bank capital rewrite, saying the rule still restrains dealers that absorb Treasury selling. - The fight centers on the supplementary leverage ratio, a backstop rule regulators say discourages low-margin Treasury intermediation at the biggest banks. - Treasury debt outstanding hit $30.8 trillion in March, while liquidity strains resurfaced during the April 2025 tariff shock. (sifma.org)
Wall Street bank groups are pushing to rewrite parts of the Federal Reserve’s capital overhaul, arguing the rules still leave dealers too constrained to absorb swings in the Treasury market. (bloomberg.com) The main target is the enhanced supplementary leverage ratio, a simple capital backstop for the biggest U.S. banks. Regulators proposed lowering it in 2025 and the final rule took effect on April 1, 2026. (fdic.gov) (occ.gov) The agencies said the change was meant to reduce disincentives for global systemically important banks to do “low-risk, low-return” business, including U.S. Treasury market intermediation. Bank groups now say the framework still needs more work. (fdic.gov) (bloomberg.com) That debate lands in a market that has grown faster than the balance sheets of the firms expected to keep it liquid. SIFMA said Treasury issuance reached $8.1 trillion through March, with $30.8 trillion outstanding. (sifma.org) An International Monetary Fund article by Anil Kashyap and Jeremy Stein said the Treasury market “can seize up abruptly” and pointed to March 2020 and April 2025 as recent breakdowns in market functioning. The authors said rising federal debt and limited dealer balance-sheet capacity have made those episodes more likely. (imf.org) The mechanics are now less bank-centered than they used to be. The IMF article said asset managers often want interest-rate exposure without holding all of it in cash bonds, while hedge funds use repo borrowing to run cash-futures basis trades. (imf.org) (federalreserve.gov) That structure can work in calm periods and snap in volatile ones. New York Fed researchers said Treasury liquidity worsened sharply after the April 2, 2025 tariff announcement, with volatility peaking between April 7 and April 9. (newyorkfed.org) Darrell Duffie of Stanford told Congress in May 2025 that Treasury debt held by the public has grown much faster than primary-dealer balance sheets. He said the ratio of Treasury debt to dealer assets has increased four-fold since 2007. (congress.gov) Regulators are trying other fixes alongside capital relief. The Securities and Exchange Commission is preparing the market for mandatory Treasury clearing, and the Treasury Department finalized changes in March 2026 to its buyback operations. (sec.gov) (federalregister.gov) The unresolved question is whether those plumbing changes arrive before the next stress episode. The Treasury market still finances the government, anchors repo, and sets the benchmark for borrowing costs across the financial system. (newyorkfed.org) (imf.org)
