Darrell Duffie on Illiquidity and Volatility in the US Treasury Market
When big fiscal meets constrained balance sheets.
Darrell Duffie, professor of finance at the Stanford University Graduate School of Business, arrives for a welcome dinner during the Jackson Hole economic symposium, sponsored by the Federal Reserve Bank of Kansas City, in Moran, Wyoming, U.S.,
Photographer: David Paul MorrisIn the global financial system, US Treasuries play a special role. They’re basically as close to cash as a financial asset can get and their yields act as the "risk-free" rate against which all other assets are measured. In other words, the US Treasury market is supposed to be the safest and most liquid in the world. But Treasuries have also been at the center of some pretty big financial events in recent years, including the March 2020 sell-off and the collapse of Silicon Valley Bank this year. The Federal Reserve has had to step in to support the market, and now there’s concern over who will buy all these bonds as the US Treasury ramps up its borrowing. So why does the world’s most important market keep experiencing these issues? And what can be done to improve the way Treasuries are bought and sold? In this episode, we speak with Stanford University finance professor Darrell Duffie, who just presented a paper about this very issue to central bankers at the annual Jackson Hole symposium. We talk to him about why the Treasury market keeps experiencing problems, what can be done to fix it, and why the issue is gaining more urgency. This transcript has been lightly edited for clarity.