The US Treasury Department is asking primary market traders if they need to buy back government bonds to improve liquidity in the Treasury market.
The Treasury requires traders to provide feedback by October 24 that bond repurchases can significantly improve liquidity and reduce volatility during bond issuance, a proposal to absorb the issuance for an off-the-day period. run of excess bonds, because once new bonds are issued, those old bonds may be more difficult to trade.
Treasury Secretary Janet Yellen also warned this week that U.S. Treasury bond markets may not be able to maintain ample liquidity as U.S. Treasury yields have soared and market volatility has increased due to the Fed tightening. Market makers’ balance sheets have not increased much, but overall the supply of Treasury bonds has continued to rise.
The buyback proposal comes after the Bank of England (BOE) was forced to buy emergency bonds, but it’s important to note that the new proposal isn’t the same as a typical central bank-backed plan to reduce its balance sheet.
Thomas Simons, a Jefferies money market economist, said: “This is not quantitative easing (QE) or quantitative tightening (QT), nor is it just the first step for central banks to explore what they can do rather than formally announcing the action is more a statement of fact than anything else “.
“It’s actually a year-round supply management program that looks like a long-term tool and targets the damage,” he said. Simons said that if the plan finally takes shape, the bond market will be more vulnerable to liquidity. .
