U.S. Treasury asks main banks if it can buy again bonds By Reuters

By Karen Brettell and Davide Barbuscia

(Reuters) -The U.S. Treasury Division is asking major sellers of U.S. Treasuries whether or not the federal government can buy again a few of its bonds to enhance liquidity within the $24 trillion market.

Liquidity on this planet’s largest bond market has deteriorated this yr partly due to rising volatility because the Federal Reserve quickly raises rates of interest to carry down inflation.

The central financial institution, which had purchased authorities bonds throughout the COVID-19 pandemic to stimulate the financial system, is now additionally decreasing the dimensions of its stability sheet by letting its bonds attain maturity with out shopping for extra, a transfer which traders concern might exacerbate worth swings.

The Treasuries market has swelled from $5 trillion in 2007 and $17 trillion in early 2020, whereas banks are dealing with extra regulatory constraints that they are saying make it tougher to intermediate trades.

The Treasury is asking sellers in regards to the specifics of how buybacks might work “with a view to higher assess the deserves and limitations of implementing a buyback program.”

These embrace how a lot it could want to purchase in so-called off-the-run Treasuries, that are older and fewer liquid points, with a view to “meaningfully” enhance liquidity in these securities.

The Treasury can also be querying whether or not diminished volatility within the issuance of Treasury payments on account of buybacks made for money and maturity administration functions may very well be a “significant profit for Treasury or traders.”

It’s additional asking in regards to the prices and advantages of funding repurchases of older debt with elevated issuance of so-called on-the-run securities, that are probably the most liquid and present subject.

“The Treasury is acknowledging the decline in liquidity they usually’re listening to what the road has been saying,” mentioned Calvin Norris, portfolio supervisor & US charges strategist at Aegon (NYSE:) Asset Administration. “I feel they’re investigating whether or not a few of these measures might assist to enhance the state of affairs.”

He mentioned shopping for again off-the-run Treasuries might probably improve liquidity of excellent points and buyback mechanisms might assist include worth swings for Treasury payments, that are short-term securities.

Nevertheless, with regards to longer-dated authorities bonds, traders have famous {that a} main constraint for liquidity is the results of a rule launched by the Federal Reserve following the 2008 monetary disaster which requires sellers to carry capital in opposition to Treasuries, limiting their capability to tackle threat, significantly at occasions of excessive volatility.

“The underlying explanation for the dearth of liquidity is that banks – as a consequence of their supplementary leverage ratios being capped – haven’t got the flexibility to tackle extra Treasuries. I view that as probably the most important subject proper now,” mentioned Norris.

The Fed in April 2020 briefly excluded Treasuries and central financial institution deposits from the supplementary leverage ratio, a capital adequacy measure, as an extra of financial institution deposits and Treasury bonds raised financial institution capital necessities on what are seen as secure property. However it let that exclusion expire and massive banks needed to resume holding an additional layer of loss-absorbing capital in opposition to Treasuries and central financial institution deposits.

The Treasury Borrowing Advisory Committee, a gaggle of banks and traders that advise the federal government on its funding, has mentioned that Treasury buybacks might improve market liquidity and dampen swings in Treasury invoice issuance and money balances.

It added, nevertheless, that the necessity to finance buybacks with elevated issuance of recent securities might improve yields and be at odds with the Treasury’s technique of predictable debt administration if the repurchases had been too variable in measurement or timing.

The Treasury is posing the questions as a part of its common survey of sellers earlier than every of its quarterly refunding bulletins.