How to Keep the Treasuries Market Functioning
Smooth trading of US government bonds is too important to depend on a handful of banks. Four changes are overdue.
A work in progress.
Photographer: Nathan Howard/Bloomberg
The $25.8 trillion market for US Treasury debt is like the circulatory system for the world’s financial markets — everything else relies on it. In recent years blockages have occasionally formed, and central banks have had to step in to restore the money flow. Now, as Treasury prices adjust to a surge in federal borrowing and a changing outlook for long-term interest rates, it’s essential that policymakers keep the market healthy.
The diagnosis is relatively simple. For decades the market has depended on a group of so-called primary dealers (today there are 24) to maintain order during times of stress. But the size of the market has exploded in the past decade, at the same time as new rules have set limits on banks’ leverage, curbing their capacity to take on assets. Meanwhile, as primary dealers’ holdings have shrunk, principal trading firms, hedge funds and other nonbanks have stepped in to play a bigger role.