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

© Reuters. FILE PHOTO: Federal Reserve Board building on Structure Avenue is pictured in Washington

By Kate Duguid

NEW YORK (Reuters) – The U.S. Treasury market silent runs the possibility of abrupt freezes in liquidity savor the one viewed in March and April, because the COVID-19 pandemic roiled the monetary machine, a member of the Federal Reserve Bank of Unique York’s Market Committee acknowledged on Friday.

The market shock in March, which helped pressure yields across maturities to all-time lows, turned into “in actual fact an unprecedented tournament,” Lorie Logan acknowledged in a speech to the Brookings-Chicago Booth Process Power on Monetary Balance.

“On the opposite hand, while it is tempting to dismiss it as a once-in-a-lifetime shock, it is serious to hold time to repeat and assess if lessons will also be learned that would possibly possibly well ranking the Treasury market even more resilient to future shocks.”

The Treasury market is the deepest and most liquid on this planet. Nonetheless, on the inaugurate of the coronavirus pandemic, a tidy different of investors tried to dump their Treasury holdings completely to ranking a restricted different of investors.

The fundamental sellers had been mutual funds, which sold off more than $200 billion of their Treasury holdings in the first quarter, foreign accounts, which sold off roughly $161 billion between February and April, and hedge funds.

The investors, Treasury market main dealers, reported that customer transaction volumes elevated from $400 billion a day in February to $650 billion a day in mid-March. Within the marketplace for getting and selling all Treasuries save for essentially the most recently issued, the unfold between the costs requested and these bid rose to an all-time high, end to 30 cases their normal stage.

Predominant dealers had been earlier than the selloff preserving historically high volumes of Treasury debt, and had been subsequently unable to hold on more, explained Logan. The Fed stepped in and started shopping Treasury debt, which returned liquidity to the market.

Nevertheless main dealers at save attend even more Treasury debt than they did on the initiating of the pandemic, and would possibly possibly well, in the tournament of one other bout of compelled selling, face the same speak sharp the overall Treasury provide on supply.

To pay for the stimulus bundle passed by Congress earlier this year – among other authorities-funded programs – the Treasury Department has issued a file $15.5 trillion thru the tip of September. Issuance would possibly possibly well upward push in the upcoming months if a new spherical of stimulus funding is passed.

“Ongoing will enhance in the stock of Treasuries would possibly possibly well also fair halt in bigger peaks in the seek information from for intermediation,” acknowledged Logan.

No longer talked about in the speech turned into the different of market volatility spherical the U.S. election on Nov. 3.

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