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Paul J. Davies

The $24 Trillion Treasury Market Needs More Than Just Clearing

Making the Federal Reserve the “dealer of last resort” would help ensure smooth trading during times of extreme stress.

An unstable market for Treasuries is a problem for everyone

An unstable market for Treasuries is a problem for everyone

Photographer: Stefani Reynolds/Bloomberg 

The $24 trillion US Treasury market has gotten too big for even the “Masters of the Universe.” As the Federal Reserve reverses its bond purchase program and more government securities flood back into the hands of dealers, banks, investors and traders, the chances of extreme, unhealthy volatility are rising. We’re at the moment that regulators and market participants have been fearing, which is that there will be more episodes like in March 2020 and September 2019 when parts of the market seized up and prices went haywire. This matters because the Treasury market is considered the most important of all as the foundation for financial assets priced in dollars the world over.

The Securities and Exchange Commission just made the first official move to keep the market from breaking. It proposed on Wednesday to force more trading in government bonds through central clearinghouses. Clearing reduces the risk that either party to a trade will fail to deliver their end of the deal. It can also allow multiple parties to net-off exposures against one another at the same time, which should give everyone more capacity to trade.