“The Fed is going to be coming in to buy a big chuck of them,” said Zachary Griffiths, an interest-rate strategist at Wells Fargo, a primary dealer. That, he said, will help alleviate concern that dealers will be inundated with supply. The U.S. deficit reached almost $1 trillion in fiscal 2019, its fourth straight increase, and economists see it widening further in coming years.
Wall Street strategists and traders also say the Fed may ultimately need to move beyond just purchasing T-bills, and include notes and bonds as well, to maintain ample liquidity in the banking system. Estimates suggest the Fed may buy as much as $300 billion of Treasuries from the open market next year. (Separately, the Fed will also replace maturing securities that it holds by buying directly from the government, helping to finance the deficit.)
“This makes being a primary dealer more attractive because they now have a non-economic buyer to sell to, which offsets some of the risk they face by having to participate in Treasury auctions,” said Scott Buchta, head of fixed income strategy at Brean Capital. “Whether that will be enough incentive to bring more in is not clear. Still, overall most people become primary dealers because it opens doors.”
This article was provided by Bloomberg News.