We believe policymakers should enact changes that lessen reliance on primary dealers to make markets in Treasuries, including by broadening access to the Fed-sponsored standing repo facility and bond-buying programs.
That was from a team of Pimco portfolio managers led by Libby Cantrill, head of public policy, in a blog post last week.
The piece suggested that the U.S Treasury market should cut intermediaries i.e. big banks out of trading and allow end-users — such as asset managers, sovereign wealth funds, or pension funds — to trade with each other.
They say in times of stress, like in March 2020, “their willingness and ability often disappears,” according to Pimco, the bond fund giant that is part of German insurer Allianz.
The proposed new system, called all-to-all trading, Pimco argues, would increase liquidity and improve function in the market.
The resiliency of the U.S Treasury system has dealt with a series of events putting pressure on liquidity in recent years
Notable market disruption events include the “Flash Rally” in October 2014, pressures in the Treasury-backed repo markets in September 2019, and the “Dash-for-Cash” in March 2020.
In 2020, securities dealers’ balance sheets were overwhelmed with investors desperately selling off safe-haven assets.
“Given the Treasury market’s growth, the current structure leaves it vulnerable in times of stress to further bouts of the extreme price volatility seen in March 2020,” the authors said.
“In our view, changes are urgently needed to lessen reliance on primary dealers to make markets, while increasing banks’ capacity to hold Treasuries,” they concluded.
They recommended policymakers take note of the following:
- Broadening access to Federal Reserve sponsored programs, such as the standing repurchase (repo) facility and bond buying programs;
- Increasing dealer balance sheet capacity by tweaking existing bank regulations;
- Using the convening authority of policymakers (e.g., the Financial Stability Oversight Council, or FSOC) to help advance “all-to-all” trading.
Pimco advised against implementing real-time reporting of Treasury transactions and requiring cash clearing of Treasuries, adding that the measures may “inadvertently hurt” liquidity.