Credit Suisse's Pozsar On What Is Needed To Stabilise Longer Term Tsys

Credit Suisse's Zoltan Pozsar notes that "Fed Chair Powell and Governor Quarles passed up two opportunities this week to offer much needed clarity on the SLR treatment of reserves and treasuries. If SLR relief is made permanent, banks can go ahead and buy more treasuries, and they can also resume buying back their own stock. That's clear and simple. If SLR relief ends and the buyback ban stays in place until the pandemic is over, banks have no choice but to buy treasuries. That's pretty clear and simple too. What's not clear and simple is the current state of affairs: the Fed already lifted the buyback ban but 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 on both sides, shedding deposits, reserves, and also treasuries. We've fielded many calls from clients during the day asking whether the sell-off in rates will force the Fed's hand regarding SLR. That would be a terrible precedent but we need clarity regardless. And if the Fed's choice is SLR relief, it needs to clarify whether reserves only or both reserves and treasuries will be exempt – concerns that only reserves will be exempt could also weigh on treasuries. For every macro narrative that explains why U.S. treasury yields are rising, there is also a plumbing narrative that can explain things with equal persuasion. The treasury curve is now steep enough for most FX-hedged foreign investors to step in and harvest the slope. But no one likes to step in front of a freight train. For long-term treasury yields to stabilize, either the dollar has to weaken so foreign central banks buy or the Fed has to talk rates down, do operation twist (selling $1 trillion of front-end paper and buying $1 trillion of long-term paper), or provide closure on SLR relief. If there's stability, carry traders will do the rest."