Is Powell Going To Twist?

Fears about a rule called the supplementary leverage ratio, or SLR, come as fixed income markets have become more volatile.

On March 31, a regulatory break that big banks have enjoyed regarding SLR is scheduled to expire.

Unless the Federal Reserve extends the break, banks will have to hold more capital against Treasury bonds, as well as deposits they keep at the Fed.

That could cut bank demand for government debt and reduce the funding for other investors to buy bonds, resulting in increased market volatility, which was a factor last March that prompted the Fed to offer banks SLR leniency.

The regulator will make a decision soon, Fed Chair Jerome Powell said last week.

Credit Suisse analyst Zoltan Pozsar recently summed up the situation in a report, saying: “The banking system is running out of balance sheet. Soon there will be too much cash.”

 Currently a "short-squeeze" going on in some USTs so let's go over what this all means.

No, the 10yr won't open at -3% tomorrow. But, if you borrowed the 10yr in the repo market to go short, there is now not enough 'borrow' in some specific issues to roll your short position: pic.twitter.com/o5P8rAmkBB— DC (@AnalystDC) March 4, 2021 

 Later in the same story, it is also reported that general collateral rates traded negative tonight and the Fed RRP facility was tapped for a rather large $507M. This are more symptoms of the general shortage of short-term collateral many have been discussing lately: pic.twitter.com/7zMsSTTeWy— DC (@AnalystDC) March 4, 2021 

 It just means that if you are long the current 10y bond, you can lend it out to raise cash at a -3% rate. That means you actually get paid 3% to borrow cash. This happens when a bond is shorted a kot and there's a lot of demand to cover that short in the repo market.— Ptr Pn (@_ptrpan) March 4, 2021 

Finally, what happens if we are right and Powell does assure the market that SLR will be extended? Well, since all of the pent up uncertainty about whether or not bank balance sheets will be usable after March 31 will disappear, what will happen is a monster short squeeze as all those shorts that pushed the 10Y to -4% in repo panic and scramble to cover, sparking a massive surge higher in prices (and plunge in yields), and since there will be immediate follow through to stocks where concerns about rising yields just sent risk assets plunging, we expect a monster move higher in stocks tomorrow.

In fact, judging by the freefall in futures, we wouldn't be surprise if the Fed announces that the SLR exemption will be granted at the usual pre-market time of 830am.

In any case, stay tuned because there will be fireworks - most likely to the upside - but if for some reason Powell refuses to unclog the repo market, there will be blood.

 THREAD RE: FED WAM-EXTENSIONS & "TWIST"

There is an important distinction worth noting...— Yogi Chan (@Yogi_Chan) March 3, 2021 

 Fed Chair JayPow is scheduled to speak in a live Q&A with @WSJ tomorrow a bit after noon eastern. Here are the options. 1/x pic.twitter.com/gcG0vB3wKP— Guy LeBas (@lebas_janney) March 3, 2021 

“I have told our clients I would not invest in any way on this OPEC meeting -- I think there are too many wildcards.”

 Mainland China stocks market closed.

Shanghai Composite Index -2.05%

Shenzhen Component Index -3.46%

ChiNext -4.87%#stockmarkets #China— CN Wire (@Sino_Market) March 4, 2021