By Geoffrey Smith
Investing.com -- U.S. stock markets headed lower for a second straight day on Friday, reversing overnight gains after the Federal Reserve said it would close a potentially significant loophole in banking regulation.
The Fed said that from March 31, banks will again have to count their Treasury bond and cash holdings towards their Supplementary Leverage Ratio. It had exempted such holdings in the first wave of the pandemic to allow the financial system to absorb a massive injection of liquidity as it slashed interest rates and started buying bonds in huge volume.
Some – but not all – analysts have argued that the ending of this exemption will reduce banks' willingness to hold Treasuries in a year when federal government borrowing is set to skyrocket. If that thesis is proved, it would put significant upward pressure on bond yields, which are already rising amid fears of a return of inflation.
By 9:45 AM ET (1345 GMT), the Dow Jones Industrial Average was down 267 points, or 0.8%, at 32,595 points. The S&P 500 was down 0.6% while the Nasdaq Composite was outperforming with a drop of only 0.2%.
The yield on the 10-year Treasury note had risen, meanwhile, to an intraday high of 1.74%.