US Treasury Market Is Resilient Despite ‘Shocks,’ Official Says
The Treasury Department’s top domestic finance official said the US government debt market has functioned well during a year of outsized interest-rate volatility, a regional banking crisis and the recent hack of the world’s largest bank.
Thursday’s remarks by Nellie Liang, the Treasury’s undersecretary for domestic finance, come against a backdrop of widespread concern about the resiliency of the $26 trillion market for Treasuries, the world’s biggest. Regulators have been examining how to strengthen the market since the Federal Reserve engaged in massive emergency purchases when the Covid crisis hit in 2020.
Liang stressed that regulators’ work to bolster resiliency must continue, in prepared remarks at the ninth annual conference on the Treasuries market held at the Federal Reserve Bank of New York. She pointed to possible additional steps to boost transparency about trading volumes and to tamp down excess leverage, particularly in non-centrally cleared bilateral repurchase agreements.
While flagging possible risks from a build-up this year of so-called basis trades — bets that use borrowed money to profit from tiny price discrepancies between futures and the underlying cash Treasuries — Liang also said the practice may provide some benefits. She highlighted the potential of the basis trade to improve liquidity and ultimately buoy demand for US debt.
In what may come as a surprise to some market participants, Liang didn’t offer any new remarks on the idea of a regulatory push for more widespread central clearing of cash Treasuries. A number of observers, including former New York Fed President William Dudley, a columnist for Bloomberg Opinion, have recommended “all Treasury transactions be routed through a central clearinghouse, which stands between counterparties and ensures that adequate collateral is collected.”