Top officials in the Treasury department have proposed sweeping changes to the way transactions in the $24tn US government bond market were disclosed, as calls grow to improve transparency and resiliency of what is considered the foundation of the global financial system.
Trading in Treasuries is notoriously opaque, and regulators and investors have long suggested that more insight would boost investor confidence, help officials spot problems more quickly and generally improve functioning and stability.
The Treasury Department proposed that transaction data for the most traded Treasury bonds – called on-the-run bonds – be made public daily, with some reporting limitations expected, based on trading size. The comments were made by Nellie Liang, the department’s undersecretary for domestic finance, at a conference on Wednesday organized by the New York Fed on the Treasury market.
After some experience with this level of reporting, Liang said the Treasury will consider releasing data on other bonds.
“The work to improve data quality and availability in the Treasury market was developed to support the official sector’s ability to assess market conditions and readiness to respond to market pressure, and also provide transparency that strengthens public confidence, fair trade, and the market ecosystem. which provides liquidity that is more resilient and elastic.”
Smooth functioning and resilience have been the main focus of Wednesday’s conference, where John Williams, president of the New York Fed, earlier said that erratic financial markets could undermine the effectiveness of the Fed’s monetary tightening efforts.
Williams stressed the central bank’s need to press ahead with its aggressive push to tame historically high inflation – which includes steep interest rate hikes and a rapid decline in its roughly $8tn balance sheet – while seeking solutions to strengthen resilience. financial system.
“For monetary policy to be most effective, financial markets must function properly. Monetary policy affects the economy by affecting financial conditions, and the Treasury market is at the center of it all. If the Treasury market is not functioning well, it can inhibit the transmission of monetary policy to the economy.
He added: “The time is now to find solutions that strengthen our financial system without compromising our monetary policy objectives.”
Wednesday’s conference comes at a critical time for the world’s most important bond market. Liquidity, or the ease with which traders can buy and sell bonds, has materially deteriorated as eat has aggressively tightened monetary policy this year in order to rein in inflation.
Treasury yield moves with interest rate policy, and volatile action in yields this year, along with uncertainty about the Fed’s future path, have made it harder and more expensive to buy and sell bonds. The concern is that poor liquidity can lead to more clarity volatilityincreasing the odds of a financial crash.
Further damaging the functioning of the market, from which all securities are priced, is a set of longstanding structural shortcomings which means that shocks in what should be a global safe haven have become commonplace.
That’s fueled ongoing calls for regulatory overhaul — something the Fed, Treasury, Securities and Exchange Commission and Commodity Futures Trading Commission have been trying to advance since the “lightning crash” in 2014 in which prices across all maturities swung dramatically.
The most recent damage was exposed in March 2020 when fears of the coronavirus pandemic led to a surge in cash that led to price volatility. That makes it nearly impossible to trade, and brokers’ screens sometimes go blank as liquidity evaporates, and the Fed is forced to intervene.
Williams on Wednesday acknowledged that the size of the Treasury market has increased dramatically in recent decades and that participants who were once important players have withdrawn, which has contributed to past, previous market shocks. research has been shown.
Also on Wednesday, US lawmakers pressed Michael Barr, the Fed’s vice-chair for supervision, about how regulation has impaired liquidity and what reforms are needed to stave off further shocks.
“As we’ve seen with the British gilts market, when the central bank has to step into that market, it has a negative impact,” said Patrick McHenry, a Republican member of the House of Representatives, at a House financial services hearing. . “We don’t want to see that in our Treasury markets, and it’s my hope that you can resolve this before we have some unpleasant events that could have serious consequences.”
In response to McHenry’s question about the leverage ratio supplement, which requires large banks to hold capital equal to at least 3 percent of their assets, Barr said that the Fed is reviewing the requirement.
Representative Ann Wagner of Missouri also grilled Barr about Treasury liquidity.