Pozsar Says Fed Has a Way to Help Stop Bludgeoning of Treasuries


Clarity on the fate of emergency measures the Federal Reserve made during the pandemic could help stop the hemorrhaging in the Treasury market, according to Credit Suisse Group AG strategist Zoltan Pozsar.

The selloff in Treasuries this week sent the benchmark 10-year Treasury yield catapulting to the highest in more than a year at over 1.6% as traders yanked forward their view on how soon the Fed will be forced to tighten policy. Adding to market jitters is the potential loss of a pillar of support that allows banks to buy more bonds.

Last April, the Fed exempted Treasuries and reserves from banks’ supplementary leverage ratios letting them expand their balance sheets with purchases of U.S. government bonds. That privilege is set to expire on March 31 and policy makers have yet to announce a decision as to whether it will remain.

“What’s not clear and simple is the current state of affairs,” Pozsar wrote in a Feb. 25 note to clients. While the central bank has lifted its stock buyback ban, it has “still not provided any clarity on SLR relief and if SLR relief does not happen,” buybacks mean that banks will trim their balance sheet, shedding deposits, reserves and also Treasuries.

At this week’s semi-annual testimony to Congress, Fed Chairman Jerome Powell said no decision has been made on the exemptions. Randal Quarles, the vice chair for supervision, made no mention in his remarks on Thursday.

Besides making a decision on the regulatory side, Pozsar said for Treasury yields to stabilize, either the dollar has to weaken to encourage foreign central-bank buying or U.S. policy makers have to talk rates down, do an Operation Twist -- selling front-end paper and buying long-end securities.

And if policy makers opt for SLR relief, they’re going to need to clarify whether only reserves, or both reserves and Treasuries will be exempt. Only excluding reserves could also weigh on Treasuries, according to Pozsar.

No matter what the Fed decides, “both would offer clarity and direction to the rates market,” he said.

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