A top official at the Treasury department has proposed sweeping changes to the way transactions in the $24tn US government bond market are disclosed, as calls grow to improve the transparency and resiliency of what is considered the foundation of the global financial system.
Trading in the Treasury market is notoriously opaque, and regulators and investors have long suggested that more insight would improve investor confidence, help officials spot problems sooner and more generally bolster functioning and stability.
The Treasury department is proposing that transaction data for the most widely traded Treasury bonds — so-called on-the-run bonds — be made public on a daily basis, with some limits on reporting expected, based on trade size. The comments were made by Nellie Liang, the under-secretary of domestic finance at the department, at a conference on Wednesday hosted by the New York Fed about the Treasury market.
After some experience with this level of reporting, Liang said the Treasury would consider releasing data about 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 preparedness to respond to market stresses, and also to provide transparency that fosters public confidence, fair trading, and a market ecosystem that provides for more resilient and elastic liquidity.”
The smooth functioning and resilience of the Treasury market has been the primary focus at Wednesday’s conference, at which John Williams, president of the New York Fed, earlier said that malfunctioning financial markets risk undermining the effectiveness of the Fed’s monetary tightening efforts.
Williams underscored the need for the central bank to press ahead with its aggressive push to tame historically high inflation — which has included steep interest rate increases and a rapid wind-down of its roughly $8tn balance sheet — while finding solutions to strengthen the resilience of the financial system.
“For monetary policy to be most effective, financial markets must function properly. Monetary policy influences the economy by affecting financial conditions, with the Treasury market at the center of it all. If the Treasury market isn’t functioning well, it can impede 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 goals.”
Wednesday’s conference comes at a tenuous 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 the Fed has aggressively tightened monetary policy this year in order to rein in inflation.
Treasury yields move with interest rate policy, and the volatile action in yields this year, along with the uncertainty about the Fed’s future path, has made it harder and more expensive to buy and sell bonds. The concern is that poor liquidity could lead to even more pronounced market volatility, increasing the odds of a financial accident.
Further undermining the functioning of the market, from which all securities are priced, is a set of longstanding structural shortcomings that have meant that shocks in what should be a global safe haven have become commonplace.
That has prompted repeated calls for a regulatory overhaul — something the Fed, the Treasury, the Securities and Exchange Commission and the Commodity Futures Trading Commission have sought to advance since a “flash crash” in 2014 in which prices across all maturities whipsawed dramatically.
The fragility of the market was most recently exposed in March 2020 when coronavirus pandemic fears ignited a chaotic dash for cash that sent prices whipsawing. That made it almost impossible to trade, with brokers’ screens at times going blank as liquidity evaporated, and the Fed was forced to intervene.
Williams on Wednesday acknowledged that the size of the Treasury market has dramatically increased in recent decades and market participants that were once major players have retreated, which has contributed to past market shocks, previous research has shown.
Also on Wednesday, US lawmakers pressed Michael Barr, the Fed’s vice-chair for supervision, about how regulation has impaired Treasury market liquidity and what reforms are needed to stave off further shocks.
“As we saw with UK gilts markets, when the central bank had to step in to prop up that market, it had a broadly negative impact,” said Patrick McHenry, a Republican member of the House of Representatives, at a House financial services hearing . “We do not want to see that in our Treasuries market, and it’s my hope that you can address this before we have some unfortunate event that could have severe consequences.”
In response to McHenry’s question about the supplementary leverage ratio, which requires large banks to hold capital equal to at least 3 per cent of their assets, Barr said the Fed was reviewing that requirement.
Representative Ann Wagner of Missouri also grilled Barr about Treasury market liquidity.