Rates as of 0500 GMT

Market Recap

It wasnt what Fed Chair Powell said, it was what he didnt say that roiled the markets. He acknowledged that the recent spike in yields was notable and caught his attention, but in response he just reaffirmed the Feds longstanding commitment to an extended period of accommodative policy, the duration of which will be dictated by progress on employment and broader financial conditions. Nothing new here.

What was important was what was absent from his speech. He didnt push back against the recent volatility in the bond market, he didnt hint at instituting yield curve control to contain the rise in yields or a possible twist in their bond purchases to dampen the rise in yields at the long end. In other words, surrender to the market.

Nor did he say anything about the esoteric but important issue of the bank supplementary leverage ratio, or SLR. The SLR requires banks to hold capital against Treasury bonds that they own as well as against deposits that they keep at the Fed. Its currently suspended, but that suspension is set to expire on March 31st. If it does expire if the Fed doesnt extend the waiver banks will have to hold more capital. That could cut bank demand for government debt and reduce the amount of money available for other investors to buy bonds. Market volatility would probably rise along with yields, which is why the Fed waived the requirement in the first place when the pandemic hit last March.

Meanwhile, the enormous US…