FAST FIVE: SLR Chaos Sparks Wild Moves In Swap Spreads
SLR Chaos Sparks Wild Moves In Swap Spreads There is a reason why we highlighted the earlier report from Politico that FDIC Chair Jelena McWilliams said it doesn't seem as though banking agencies need to extend the SLR extension.
This matters because as we first explained two days ago in “The SLR Is All That Matters For Markets Right Now”, and as Bloomberg's Edward Bolingbroke writes this afternoon, the market is unhappy with the potential risk that bank balance sheets will become significantly more constrained after April 1 (when the SLR ratio will return all else equal and holding excess TSYs will be punished by regulators) and as a result long-end dollar swap spreads have collapsed “as talk heats up on whether the Federal Reserve will extend exemptions from a key regulatory rule, which expires at the end of this month.
The move in the long-end swap spread followed a similar dive on Wednesday after Senator Elizabeth Warren said US regulators should reject banks' appeals to extend an easing of capital requirements.
As discussed here extensively, on Thursday Fed Chair Powell failed to address the topic in his interview with Wall Street Journal leading to great uncertainty about the future of what could amount to tens of billions of TSY securities on bank books which would have to be liquidated at the worst possible time: just as yields are spiking.
As a result, swap spreads are starting to price in the potential funding squeeze, and absent a prompt resolution, it is very likely that swap spreads can turn negative in the coming days as markets frontrun the Treasury market mess that could emerge as soon as April 1.