The U.S. Treasury Department is asking primary market traders if they need to repurchase government bonds to improve liquidity in the Treasury market.
Treasury requires dealers to provide feedback by Oct. 24 on whether repurchasing securities can significantly improve liquidity and reduce volatility when issuing bonds, a proposal to absorb the issuance for an off-the-run period. of excess bonds, because once new bonds are issued, those old bonds may be more difficult to trade.
Treasury Secretary Janet Yellen also warned this week that U.S. Treasury bond markets may not be able to maintain ample liquidity as U.S. Treasury yields soared and market volatility escalated by Fed tightening. Market makers’ balance sheets haven’t expanded much, but overall Treasury supply has continued to climb.
The repurchase proposal comes after the Bank of England (BOE) was forced into emergency bond-buying, but it is important to note that the new proposal is not the same as a typical central bank-promoted plan to shrink its balance sheet.
Thomas Simons, money market economist at Jefferies, said: “This is not quantitative easing (QE) or quantitative tightening (QT), neither, it’s just the first step for central banks to explore what they can do rather than formally announce Action, it’s more of a fact finding.”
“It’s actually a year-round supply management program that looks like a long-term tool and targets the damage,” he said. Simons said that if the plan finally takes shape, the bond market will be more vulnerable to Liquidity is expected to improve.