A senior Treasury Department official has proposed sweeping changes to how transactions in the $24 billion U.S. government bond market are disclosed, amid growing calls to improve the transparency and resilience of that market. which is considered the foundation of the global financial system.
Treasuries trading is notoriously opaque, and regulators and investors have long suggested that a better understanding would improve investor confidence, help officials spot problems earlier and, more generally, bolster functioning and stability. .
The Treasury Department is proposing that transaction data for the most widely traded treasury bills — the so-called short-term bonds — be made public daily, with certain expected reporting limits, depending on the size of the transaction. The comments were made by Nellie Liang, the department’s undersecretary for domestic finance, at a conference hosted by the New York Fed on the Treasury market on Wednesday.
After some experience with this level of reporting, Liang said the Treasury would consider releasing data on other bonds.
“Work to improve the quality and availability of Treasury market data has been developed to support the official sector’s ability to assess market conditions and its preparedness to respond to market stress, and also to provide transparency that promotes public trust, fair trading, and a market ecosystem that provides more resilient and elastic liquidity.
Functioning and resilience were the focus of Wednesday’s conference, where New York Fed President John Williams earlier said that dysfunctional financial markets risk undermining the effectiveness of monetary tightening efforts by the Fed.
Williams stressed the need for the central bank to continue its aggressive efforts to rein in historically high inflation — which has included steep interest rate hikes and a rapid reduction in its balance sheet of about $8 billion — while finding solutions to strengthen the resilience of the financial system.
“For monetary policy to be more effective, financial markets must function properly. Monetary policy influences the economy by affecting financial conditions, with the Treasury market at the center of it all. If the treasury market is not functioning well, it can hamper the transmission of monetary policy to the economy.
He added: “Now is the time to find solutions that strengthen our financial system without undermining our monetary policy objectives.”
Wednesday’s conference comes at a tenuous time for the world’s largest bond market. Liquidity, or the ease with which traders can buy and sell bonds, has deteriorated significantly as the Fed has tightened monetary policy aggressively this year to contain inflation.
Treasury yields move with interest rate policy, and volatile yield action this year, along with uncertainty about the Fed’s future path, has made it harder and more expensive to buy and sell. sale of bonds. The concern is that low liquidity could lead to even more pronounced volatility, increasing the risk of a financial crash.
A long-standing set of structural shortcomings that have made shocks in what should be a global safe haven become commonplace further undermine the functioning of the market, from which all securities are priced.
That prompted repeated calls for a regulatory overhaul — something the Fed, Treasury, Securities and Exchange Commission and Commodity Futures Trading Commission have sought to advance since a 2014 “flash crash” in the US. during which the prices of all maturities fell dramatically.
The fragility was last exposed in March 2020 when fears of a coronavirus pandemic sparked a chaotic race for silver that led to price volatility. This made it nearly impossible to trade, with broker screens sometimes going blank as liquidity evaporated, and the Fed was forced to intervene.
Williams acknowledged on Wednesday that the size of the Treasury market has grown significantly over the past few decades and that participants who were once big players have retreated, contributing to past market shocks, previous research shows.
Also on Wednesday, U.S. lawmakers pressed Michael Barr, the Fed’s vice chairman for supervision, about how regulation has hurt liquidity and what reforms are needed to avoid further shocks.
“As we’ve seen with UK gilt markets, when the central bank has had to step in to support that market, it’s had a largely negative impact,” Republican Member of the House of Representatives Patrick McHenry said during a briefing. a financial services hearing in the House. . “We don’t want to see that in our Treasuries market, and I hope you can fix that before we have an unfortunate event that could have serious consequences.”
In response to McHenry’s question about the supplemental leverage ratio, which requires large banks to hold capital equal to at least 3% of their assets, Barr said the Fed is reviewing this requirement.
Rep. Ann Wagner of Missouri also asked Barr about Treasury liquidity.
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