The financial markets are closely watching how Trump and his Treasury Secretary will handle the U.S. 10-year bond yield.
Recent developments suggest that easing banking regulations, particularly the Supplementary Leverage Ratio (SLR) rule, could be a key tool in their strategy.
But how did we get here? To understand this, we need to go back to 2008—the financial crisis that changed everything.
A Look Back: The 2008 Financial Crisis and Banking Regulations
The 2008 financial crisis exposed the vulnerability of financial institutions to liquidity risks.
Banks held too many assets relative to their capital, leading to excessive leverage.
In response, the U.S. government introduced new regulations to ensure financial stability.
One of the major regulatory changes was the Dodd-Frank Act (2010), which included the Supplementary Leverage Ratio (SLR) rule.
This regulation required banks to maintain a certain capital-to-asset ratio to prevent excessive risk-taking.
- Standard banks had to maintain an SLR of at least 3%.
- Large banks (G-SIBs) with over $250 billion in assets had to maintain at least 6%.
The goal? Either increase capital or limit asset growth to ensure financial resilience.
COVID-19 and the Temporary SLR Adjustment
Fast forward to 2020, the COVID-19 pandemic disrupted financial markets.
The demand for U.S. Treasuries temporarily declined, causing a drop in bond prices. This was a problem because banks needed to buy Treasuries to stabilize the market, but the SLR rule made it difficult for them to do so.
In response, the U.S. government temporarily excluded Treasuries from the SLR denominator, making it easier for banks to purchase them. As a result:
- Banks started buying more U.S. Treasuries.
- Mid-sized banks, with fewer investment options, increased their Treasury holdings significantly.
However, this temporary policy had unintended consequences, which became apparent three years later.
How Rising Interest Rates Crashed Silicon Valley Bank (SVB)
To understand what happened next, let’s take a quick look at how bond prices and interest rates are connected:
- When interest rates rise, bond prices fall.
- When interest rates fall, bond prices rise.
Many U.S. regional banks, including SVB, held long-term Treasuries that were purchased during the low-interest-rate period.
As the Federal Reserve raised rates aggressively, the value of these bonds plummeted, leading to massive unrealized losses.
SVB’s problem was that it had categorized most of its bonds as “held-to-maturity”, meaning it didn’t have to record market losses on its balance sheet.
However, when customers started withdrawing deposits, the bank was forced to sell these assets at a loss—triggering a bank run.
Within two days, SVB collapsed as $48 billion in deposits were withdrawn. This was one of the fastest bank failures in history, driven by the speed of modern digital banking.
The Federal Reserve and Treasury’s Response
After SVB’s collapse, the Fed and Treasury had three urgent problems to solve:
- Protecting startups and businesses that held uninsured deposits at SVB.
- Preventing bank runs from spreading to other institutions.
- Stopping banks from dumping U.S. Treasuries, which could worsen the financial crisis.
To address these issues, the Fed introduced the Bank Term Funding Program (BTFP).
This program allowed banks to use U.S. Treasuries and mortgage-backed securities (MBS) as collateral to borrow cash from the Fed. But there was a crucial detail:
The Fed accepted these assets at face value (not market value).
This was a game-changer. It was like allowing someone to take out a mortgage based on their home’s original price rather than its current market value.
For the U.S., which issues the world’s reserve currency, this was a unique tool to stabilize the banking system.
Trump’s Plan to Lower the 10-Year Treasury Yield
Now, let’s bring it back to Trump. In January 2025, he and his Treasury Secretary Scott Bessent made it clear: their main focus is on the 10-year Treasury yield.
Instead of pressuring the Fed to cut rates, they are looking for alternative ways to lower long-term bond yields.
How?
- Making U.S. Treasuries “more valuable” by increasing demand.
- Easing SLR regulations, encouraging banks to buy more Treasuries.
- Using tariffs as leverage, pushing other countries to purchase U.S. bonds.
With the U.S. running large budget deficits, reducing Treasury issuance is not a realistic option.
So, the best strategy is to increase demand—both from domestic banks (through SLR changes) and from international investors (through trade policies).
SLR Regulation: The Key to Trump’s Strategy?
One major obstacle to SLR reform was Michael Barr, the Fed’s Vice Chair for Supervision, who strongly advocated for strict bank capital rules.
However, in February 2025, Barr announced his resignation, removing a key barrier to SLR changes.
With this hurdle out of the way, the Trump administration may push for an SLR adjustment—similar to the 2020 COVID-era exemption—as a tool to support the bond market.
Final Thoughts
Trump and his Treasury Secretary are signaling a strategic effort to lower 10-year bond yields. Their approach seems to involve a combination of:
- Regulatory changes (SLR adjustments).
- Trade policies (using tariffs to encourage foreign bond purchases).
- Market incentives (ensuring banks have a reason to buy more Treasuries).
Whether this plan succeeds will depend on multiple factors, including market reactions, Federal Reserve policy, and global economic conditions.
One thing is clear: the U.S. bond market is about to enter a very interesting phase.
