A senior Treasury Department official has proposed sweeping changes to the way transactions in the $24 billion US government bond market are disclosed, as calls mount to improve the transparency and resilience of what it considers the foundation of the global financial system.
Treasury trading is notoriously unclear, and regulators and investors have long suggested that greater understanding would improve investor confidence, help officials spot problems earlier, and more generally strengthen the functioning and the stability.
The Treasury Department proposes that transaction data for the most traded Treasury bills — so-called on-the-run securities — be made public on a daily basis, with some reporting limits in place, based on the size of trades. The comments were made by Nellie Liang, undersecretary of national finance at the department, at a conference hosted by the New York Fed on Wednesday on the Treasury market.
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 data in the Treasury market is being developed to support the capacity of the official sector to assess market conditions and readiness to respond to market pressures, as well as to provide transparency that promotes trust of the public, fair trade and a market ecosystem that provides for more resilient and resilient liquidity”.
Smooth running and resilience were the main focus of Wednesday’s conference, in which New York Fed chairman John Williams earlier said that malfunctioning financial markets risk undermining the effectiveness of monetary tightening efforts of the Fed.
Williams stressed the need for the central bank to move forward with its aggressive push to tame historically high inflation – which has included steep interest rate hikes and a swift liquidation of its roughly $8 trillion balance sheet – as it finds solutions to strengthen the resilience of the financial system.
“For monetary policy to be most effective, financial markets need to function properly. Monetary policy influences the economy by influencing financial conditions, with the Treasury market at the center of it all. If the Treasury market doesn’t work well, it can hamper the transmission of monetary policy to the economy.
He added: “The time has come to find solutions that strengthen our financial system without compromising our monetary policy goals.”
Wednesday’s conference comes at a low time for the world’s most important bond market. Liquidity, or the ease with which traders can buy and sell bonds, has deteriorated significantly as the Fed has aggressively tightened monetary policy this year to curb inflation.
Treasury yields move with interest rate policy, and this year’s volatile yield action, coupled with uncertainty about the Fed’s future path, has made it more difficult and expensive to buy and sell bonds. The concern is that low liquidity could lead to even more pronounced volatility, increasing the odds of a financial crash.
Further undermining the functioning of the market, from which all securities are priced, is a series of long-standing structural deficiencies that have meant that shocks in what should be a global safe haven have become the order of the day.
This has prompted repeated calls for a regulatory overhaul, something the Fed, Treasury, Securities and Exchange Commission and Commodity Futures Trading Commission have tried to do after a “flash crash” in 2014 in which prices across all maturities they fluctuated drastically.
The fragility was most recently exposed in March 2020, when fears of the coronavirus pandemic triggered a chaotic run on liquidity that led to price volatility. This made trading nearly impossible, with brokers’ screens sometimes going blank as liquidity evaporated and the Fed was forced to intervene.
Williams acknowledged Wednesday that the size of the Treasury market has increased dramatically in recent decades and that participants who were once significant players have withdrawn, which has contributed to past market shocks, previous research has shown.
Also on Wednesday, US lawmakers pressed Michael Barr, the Fed’s vice chairman for oversight, on 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 has had a largely negative impact,” said Patrick McHenry, a Republican member of the House of Representatives, at a hearing. on House Financial Services. “We don’t want to see this in our Treasury market, and I hope you can address this before an unfortunate event occurs that could have serious consequences.”
In response to McHenry’s question about the extra leverage ratio, which requires big banks to hold capital equal to at least 3% of their assets, Barr said the Fed is reviewing that requirement.
Missouri Rep. Ann Wagner also questioned Barr about Treasury liquidity.