Fed’s Take
“Market liquidity is definitely lower,” New York Fed President John Williams acknowledged this week. But he added, “It’s still functioning.”
Fundamental to the structural challenge is the surge in supply -- Treasury debt outstanding has climbed by $7 trillion since the end of 2019. And big financial institutions haven’t been as willing to serve as market-makers, burdened by the so-called supplementary leverage ratio, or SLR, which requires that capital be put against such activity (as well as reserve holdings).
Fed Governor Michelle Bowman encouraged some observers with remarks this week signaling openness to adjusting the SLR. But Bowman’s not in the key role overseeing such a move, which would fall to Michael Barr, the newly installed vice chair for supervision.
Josh Younger, JPMorgan Chase & Co.’s global head of asset liability management research and strategy, agrees with Williams that for now the system is “functioning.”
Fulfilling Role
“But for Treasuries to serve the purpose for which they have been anointed -- which is a cash substitute -- the intermediation mechanism” needs to be more robust, Younger said. “It’s still important to fix the system” so that it can handle a March 2020 type of strain, he said.
Among the other moves regulators are looking at is enhancing the role of central clearing of Treasuries, for which the Securities and Exchange Commission has put forth a proposal. For its part, Pacific Investment Management Co. wants investors to be able to trade directly with each other.
“The individual initiatives being discussed may not be silver bullets on their own, but collectively they would contribute to a more efficient, resilient and liquid market,” said Stephen Berger, global head of government and regulatory policy at Citadel Securities. “Delaying unnecessarily the implementation of the market enhancements being discussed perpetuates the risk that the Fed feels compelled to intervene during a future market dislocation.”
This article was provided by Bloomberg News.