US Bonds Gain as Official Says Capital Rule Change Is on Agenda

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US Bonds Gain as Official Says Capital Rule Change Is on Agenda

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April 15, 2025

(Bloomberg) — US government debt rallied Tuesday, erasing declines after a Treasury Department official said a rule change was under consideration that could lower trading costs for banks.

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While the rule change mentioned by Deputy Treasury Secretary Michael Faulkender has been on the radar for years, his comments on the Supplementary Leverage Ratio, or SLR, helped drive yields lower by as much as seven basis points for some tenors, to levels last seen during last week’s market turmoil. Yields remained lower by as much as four basis points in late trading.

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Investors also were motivated to buy longer-maturity Treasury debt at yield levels that offer the most compensation, relative to shorter-maturities, in more than a decade. The term premium increased to 71 basis points, last seen in September 2014, according to data from the Federal Reserve Bank of New York referring to last week.

“Giving banks capital relief to buy Treasuries helps at the margin,” Chris Diaz, a portfolio manager at Brown Advisory, said. “I am more concerned about the long-term supply and demand issue” created by the potential for tax cuts to increase the US borrowing need.

Term premiums have been on the rise as US economic policy becomes harder to predict. A gauge of policy uncertainty neared a record this month after President Donald Trump announced sweeping tariffs and then backtracked on some. Proposals for tax cuts and a potential need to increase the US government debt limit also contributed to the move.

“There are real fundamental concerns driving yields higher, rather than just investors exiting positions amid market volatility,” Ed Yardeni, the founder of Yardeni Research in New York, wrote in a note. “Perhaps the likelihood of a new debt-ceiling bill that blows out the deficit plus policy uncertainty are raising the term premium on bonds.”

Earlier this month, Treasury Secretary Scott Bessent indicated that the federal government is at risk of running out of room to make good on all of its payment obligations on time as soon as May or June.

The US has long benefited from abundant demand from foreigners for its debt, who currently hold about 30% in total. That’s helped compress term premiums and reduce borrowing costs, but the trend is flipping into reverse.

“The decline in foreign demand for US Treasuries is a paradigm shift in the demand dynamic and recent events could accelerate this trend,” Societe Generale SA strategists including Subadra Rajappa wrote in a note. That should lead to higher term premium and worsen US deficit projections as net interest outlays climb, they added.

At the same time, higher Treasury yields are failing to support the value of the US dollar as they have historically. The relationship between the dollar and Treasury yields is the weakest in three years as investors question the dollar’s haven status and central role in the global financial system. Options positioning shows show that traders expect more losses for the dollar.

Treasuries fell the most since 2001 last week, as investors questioned the longstanding haven qualities of US government debt and the dollar. The 10-year yield surged to 4.59% on Friday, its highest since February, before retreating and snapping a five-day losing streak on Monday.

Concerns that tariffs will cause a near-term spike in inflation and curb the Federal Reserve’s ability to cut interest rates have capped gains for shorter-dated Treasuries. US 10-year breakevens, a gauge of long-term inflation expectations, have fallen since tariffs were announced on April 2, while real yields have soared.

Many market watchers last week suggested that foreign powers including China were offloading their US Treasury holdings in retaliation for Trump’s tariffs, exacerbating the plunge in prices. Bessent sought to play down the selloff, rejecting that speculation and adding his department has a “big toolkit” that can be rolled out if needed.

Still, there are signs that investor confidence toward US assets has been “meaningfully dented,” according to Benoit Anne, senior managing director at MFS Investment Management’s strategy and insights group.

“The UST market may have lost — at least temporarily — some of its legendary defensive characteristics,” he added. “In the face of higher risk aversion, UST do not seem to offer currently the protection that they used to.”

–With assistance from James Hirai, Ravil Shirodkar and Masaki Kondo.

(Adds Treasury official’s comments, updates yield levels.)

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