Threats to U.S. Treasury market liquidity still exist, Fed says

In this news, we discuss the Threats to U.S. Treasury market liquidity still exist, Fed says.

NEW YORK (Reuters) – The US Treasury market continues to run the risk of sudden liquidity freezes like that seen in March and April, as the COVID-19 pandemic shook the financial system, a member of the Federal Reserve Bank of New York’s Market The committee said on Friday.

The March stock market shock, which helped push yields on all maturities to historically low levels, was “a truly exceptional event,” Lorie Logan said in a speech to the Brookings-Chicago Booth Task Force on Financial Stability.

“However, while it is tempting to dismiss it as a once in a lifetime shock, it is important to take the time to reflect and assess whether any lessons can be learned that could make the treasury market even more resilient to shocks. future. “

The Treasury market is the deepest and most liquid in the world. Nonetheless, at the start of the coronavirus pandemic, a large number of investors attempted to sell their Treasury holdings only to find a limited number of buyers.

The main sellers were mutual funds, which sold more than $ 200 billion of their treasury holdings in the first quarter, foreign accounts, which sold about $ 161 billion between February and April, and hedge funds.

The buyers, the Treasury market’s primary traders, reported that client transaction volumes had grown from $ 400 billion per day in February to $ 650 billion per day in mid-March. In the market for buying and selling all but the most recent treasury bills, the spread between asking and bought prices has reached an all-time high, almost 30 times their normal level.

Prior to the sale, primary dealers held historically high volumes of Treasury debt and were therefore unable to take on more, Logan said. The Fed stepped in and started buying Treasury debt, which returned liquidity to the market.

But the primary dealers currently hold even more Treasury debt than they were at the start of the pandemic and could, in the event of a new episode of forced sale, face the same problem of absorbing the entire supply of Treasury.

To pay for the stimulus package passed by Congress earlier this year – among other government-funded programs – the Treasury Department issued a record $ 15.5 trillion through the end of September. Emissions could increase in the coming months if a new round of stimulus funding is adopted.

“Continued increases in the stock of treasury bills could lead to larger spikes in demand for intermediation,” Logan said.

The possibility of market volatility around the November 3 US election was not mentioned in the speech.

Reporting by Kate Duguid. Editing by Ira Iosebashvili and Tom Brown

Original © Thomson Reuters

Originally posted 2020-10-24 01:26:10.

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