How a plan to fix a $326 billion hole on bank balance sheets could underpin a Warsh and Bessent Treasury twist

By Steve Goldstein

Citrini Research ties together Treasury action in long bonds with regulatory reform and a Fed shift

It looks, according to Citrini Research, as if Federal Reserve Chair Kevin Warsh and Treasury Secretary Scott Bessent are acting in a coordinated way to reduce long-term bond yields.

There were data released this week that, in previous years, tended to stir financial markets.

The data came from the Federal Deposit Insurance Corp.'s quarterly banking profile, and the statistic in question is unrealized losses on bank securities. The number remains substantial - $326.7 billion as of the second quarter - albeit down from the 2023 peak of $688 billion.

The issue of unrealized losses at banks came to a head after the run on Silicon Valley Bank in 2023. The bank's collapse stemmed from a few issues, the central one being that the boring old bonds it bought as it expanded in size deteriorated in value as the Federal Reserve had to jack up interest rates due to the surge in inflation.

We revisit that history because of a new research piece from independent research firm Citrini, which neatly ties together that existing black hole on bank balance sheets, the recent Treasury-bond buyback and a Fed now under the direction of Kevin Warsh. "We see bank liquidity reform as the Trojan Horse for a new Treasury-Fed Accord, one in which the Fed shrinks and the banking system expands, both the Fed and the banks buy bills, the Treasury sells bills instead of bonds, and long duration paper gets scarcer," the firm says.

The idea is that looser regulations on banks will mean these firms need to set aside less cash and are able to lend more, buying more Treasurys in the process. The specific loosening that Treasury Secretary Scott Bessent wants is to count borrowing capacity at the Fed's discount window toward meeting bank liquidity coverage rules. Quantifying that, it would mean some $500 billion to $1 trillion in extra capacity, or 1.5% to 3% of nominal gross domestic product.

The Citrini report identifies the banks that would benefit most if liquidity rules are loosened: Bank of America (BAC), US Bancorp (USB), Truist Financial (TFC) and Capital One Financial (COF). The banks that would least benefit are Flagstar (FLG), Western Alliance Bancorp (WAL) and Banc of California (BANC), because even with reform they'll still be liquidity-light.

But bank reform isn't the only game in town. There was the shock last week when Bessent announced the buyback of 30-year securities and said, publicly, that the Treasury could do more. A further report that the Treasury could fund purchases of longer-term Treasury debt from its own account, rather than only through the sale of bills, would add to its capacity. Citrini noted that Bessent himself dropped several hints of something bigger, in an interview with CNBC.

Speaking of the intervention in the Japanese yen, "I have asymmetric information," said Bessent. "Do we know something the market doesn't know that, in terms of being willing to do, you know, what I would call a Treasury twist here in terms of the bond market? What do I know that the market doesn't know?"

Granted, Bessent could be bluffing. "We don't think it's a bluff," said Citrini in its report, but it did concede Bessent understands the value of an ability to scare investors into doing his job for him.

And then there's the Fed. Warsh has already stated, in front of Congress, that he wants both the size and the duration of central-bank bond holdings to decrease. He's named former Fed governor Jeremy Stein - someone who was cited in a Bessent speech on liquidity reforms - to lead a task force on the Fed balance sheet.

Putting it all together, Citrini expects the long bond to rise in value. It advised investors to make a "flattener" trade - that the 30-year yield BX:TMUBMUSD30Y will drop by more than the yield on the 5-year note BX:TMUBMUSD05Y - through November. That said, the Citirini team is "skeptical that the Bessent/Warsh plane lands smoothly" in the medium to long term, so the firm is long gold (GC00) and short the U.S. dollar (DX00).

The market

U.S. stock futures (ES00) (NQ00) were mixed in early Friday action. Bitcoin (BTCUSD) was trading below $80,000.

 
Key asset performance                                                Last       5d      1m      YTD     1y 
S&P 500                                                              7730.99    1.18%   3.94%   12.94%  18.90% 
Nasdaq Composite                                                     26,541.35  1.82%   5.65%   14.20%  22.28% 
10-year Treasury                                                     4.687      -4.90   -5.30   51.50   45.40 
Gold                                                                 4655.7     -0.13%  13.59%  7.47%   32.40% 
Oil                                                                  83.2       -3.97%  -4.15%  44.92%  29.98% 
Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Fed Chair Kevin Warsh's keynote address in Jackson Hole, Wyo., is due to start at 10 a.m. Eastern time. The Chicago purchasing managers' index and the final reading of the August consumer-sentiment survey are set for release.

Scheduled for around 10 a.m. is the Labor Department's preliminary estimate of payrolls revisions through March 2026. Goldman Sachs expects an upward revision of as much as 450,000.

Marvell Technology's stock (MRVL) fell even as the microchip maker increased its revenue guidance.

PayPal shares (PYPL) declined following a Bloomberg report that Advent International and payment processor Stripe have abandoned attempts to buy the company.

Iren (IREN), the data-center operator, missed its revenue goal and took an impairment for writing down the value of its bitcoin-mining hardware.

How a trendy Canadian retailer is grappling with Trump's tariffs.

Top tickers

Here were the most active stock-market ticker symbols on MarketWatch as of 5 a.m. Eastern time.

 
Ticker symbol  Company 
NVDA           Nvidia 
TSLA           Tesla 
AMZN           Amazon.com 
SPCX           SpaceX 
MU             Micron Technology 
MRVL           Marvell Technology 
AAPL           Apple 
TSM            Taiwan Semiconductor Manufacturing Co. 
GME            GameStop 
AMD            Advanced Micro Devices 

The chart

Citi strategists, led by Adam Pickett, head of global macroeconomic strategy, argue the rise in the 30-year yield is due to investor perceptions of energy and growth, and not some panic over the fiscal situation or inflation. Here they plot the rise in the 30-year yield versus the S&P 500 and the energy component of the Bloomberg commodity index, on an impressive triple Y-axis.

-Steve Goldstein

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08-28-26 0844ET

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