While markets focus on the G-SIB and Basel III capital proposals, regulators are signaling that changes to liquidity rules are next. These future regulations could have a more significant impact on markets and the Fed's balance sheet than the current capital-focused reforms.

Contrary to fears of a spike, a major rise in 10-year Treasury yields is unlikely. The current wide gap between long-term yields and the Fed's lower policy rate—a multi-year anomaly—makes these bonds increasingly attractive to buyers. This dynamic creates a natural ceiling on how high long-term rates can go.

Banks oppose stablecoins because they disrupt a core profit center: the spread between low interest paid on deposits and high yields earned from investing those deposits in treasuries. Stablecoins can pass these yields directly to consumers, creating a competitive market.

Concerns over US term premium have receded partly because the Treasury buyer base has stabilized. The declining share of price-insensitive buyers (Fed, foreign investors, banks), which fell from 75% to 50% over a decade, has finally stopped falling, creating a more supportive demand backdrop.

A new Fed Chair advocating for a smaller balance sheet cannot simply sell assets without causing market volatility. The Fed must first implement complex, long-term regulatory changes to reduce commercial banks' demand for reserves. This involves coordination with the Treasury and is not a quick policy shift.

The early end to the Fed's Quantitative Tightening (QT) is largely irrelevant for year-end funding pressures. The monthly $20 billion runoff is insignificant compared to daily swings in Treasury balances or money market funds. The primary drivers remain bank balance sheet constraints and regulatory hurdles.

The Basel III regulations, intended to de-risk the financial system by making risky lending expensive for banks, had an unintended consequence. The demand for risky loans didn't vanish; it simply migrated from the regulated banking sector to the opaque, unregulated private credit market, creating a new systemic risk.

New regulations like the Basel Endgame are expected to give banks more capital and regulatory clarity. This will encourage them, as the largest mortgage investors, to resume buying mortgages, tightening the 'spread' component of mortgage rates and thus lowering borrowing costs.

While often overlooked, easing regulatory policy is a powerful stimulus. The finalization of key capital rules is expected to free up approximately $5.8 trillion in balance sheet capacity for globally important banks, a significant but opaque driver of market liquidity that is separate from monetary or fiscal actions.