Treasury Secretary Scott Bessent has a plan to prop up a government-bond market destabilized by Washington’s chaotic economic policies: Let banks load up on federal debt.
This would be a questionable idea in any environment. At a time when America’s reliability is in doubt, it’s irresponsible.
Treasury securities provide a real-time measure of global confidence in the US and its economy. They’ve long been considered so safe that they serve as the “risk-free” benchmark for valuing tens of trillions of dollars in stocks, bonds and other investments worldwide. In times of distress, investors have tended to flock to the haven of Treasuries, driving prices up and yields down.
Now, though, that confidence might be slipping. Amid the shock of the US administration’s tariff announcements and attacks on its own central bank, Treasury prices have dropped together with the dollar and risky assets such as stocks. To the extent this dynamic reflects concerns about the government’s ability to manage its finances and the economy, it’s extremely troubling. Such fears can become self-fulfilling if they push borrowing costs up far enough.
Bessent has chosen this precarious moment to advocate loosening a key guarantor of the financial system’s resilience. Known as the supplementary leverage ratio, it stipulates that for each $1 in loss-absorbing equity, the largest banks can’t have more than $20 in assets — including US government bonds, which regulators’ primary “risk-weighted” capital requirements consider only indirectly (via flawed stress tests, for instance).
Critics say the constraint undermines orderly trading in the Treasury market, limiting the capacity of banks that act as dealers to, say, ramp up their holdings when others are selling. Their solution: Allow more leverage, exempt US government debt from the ratio or both. As bond prices plummeted earlier this month, Bessent suggested that leverage-ratio reforms could create “a new buyer for Treasury securities.”
Yet banks are already overleveraged, and Treasuries aren’t entirely safe. Their prices can be highly sensitive to interest rates: From April 7 to 11, as the yield on 10-year Treasury notes rose by more than 50 basis points, prices declined by about 5%. Losses on Treasuries toppled Silicon Valley Bank in 2023. Worse, the more banks hold, the more their financial fates are connected to the government’s — a “doom loop” that played out viciously in Europe in the early 2010s. Freeing them to load up now, with US federal debt and deficits on a distressing trajectory, would be the opposite of a reassuring signal.
If Bessent wants to ensure the smooth functioning of the Treasury market, there are other options. The Federal Reserve could provide more participants with access to its standing repo facility, which lends cash against the collateral of government bonds. In emergencies, it could even consider stepping in to prevent undue price distortions.
If, however, Bessent wants to restore confidence in the US and its sovereign debt, he should be more ambitious. Pursuing a comprehensible trade policy and making an effort to get government finances under control would be a good start. Weakening banks will achieve nothing good.
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