‘This is not QE or QT. This is not one of them. ‘ Why the US Treasury is probing debt buybacks

The U.S. Treasury Department on Friday said it plans to start talking to prime dealers by the end of October about the possibility of starting to buy back some old debt to help stave off market turmoil.

The plan, if approved, would mark a major milestone in the roughly $22.6 trillion US government debt market, the largest in the world, by providing a new tool for the Treasury. to help support market liquidity, a source of growing concern.

See: Yellen Treasury worried about ‘appropriate liquidity loss’ in US government bond market

The proposal comes after the Bank of England was forced to engage with a emergency program to buy temporary government debt and to give UK superannuation funds more time to settle the already exhausting bets. Volatility erupted as global central banks struggled to combat soaring inflation by ending the accommodative monetary policies that had prevailed for much of the past decade.

Importantly, unlike in the UK, the new Treasury proposal is separate from the Federal Reserve’s plan to drastically reduce the size of its balance sheet by allowing holdings of Treasuries. and mortgage bonds roll out at maturity, a process known as “quantitative tightening.” (QT), after it attacks record size of nearly 9 trillion dollars less than two years of “quantitative easing” (QE).

“This is not QE or QT. Thomas Simons, money market economist at Jefferies, said in a phone interview. “This is the first round, really serious to see if they can do something. This is quite far from an announcement. It’s more like fact-finding.”

However, Simons said if the plan takes shape, it could help improve liquidity “where it’s not so good.”

How Treasury Repurchases Could Work

The Treasury asked dealers for feedback on Monday, October 24, on a new tool to buy back its sold securities each year and whether it would “significantly improve liquidity,” reduce volatility in T-bill issuance and help address other market concerns.

The idea would be to use the “unwanted supply” of tradable securities that may become more difficult to trade as they are replaced by newer Treasuries or running securities.

Simons said of the Treasury proposal: “It’s really a program of supply management throughout the year. “It looks like a tool they can use over the long term and aim for liquidity when it goes down.”

The Treasury has met quarterly with the dealer community to gather feedback on market performance over the years. Acquisition was discussed in the previous section meeting in August 2022 and February 2015.

Is a British-style debt crisis unfolding in the US?

The Federal Reserve began accelerating the shrinking of its balance sheet this fall, by allowing more of its bonds to mature. It is also no longer an active participant in the secondary market for Treasury securities, raising concerns about potential devastation and who could become an anchor buyer.

Read: The next financial crisis may have hit – but not where investors might expect

Stephen Stanley, chief economist at Amherst Pierpoint Securities, said that while the Fed’s holdings of Treasury securities would be considered non-profit, the Treasury proposal “would not have any relation to those with what the Fed has been doing” to shrink its balance sheet, Stephen Stanley, chief economist at Amherst Pierpoint Securities, said Market Watch.

The recent volatility in the UK sow market could be the catalyst for the US Treasury to put buybacks back on the agenda, Stanley said, but he is also not worried about the emergence. Its return as a topic of discussion.

“This is the primary way the Treasury interacts formally with its principal dealers,” said Stanley.

Simons at Jefferies went a step further, arguing that if the Bank of England had had a separate, parallel partner, like the US Treasury, it might not have experienced “a negative market reaction.” market” like this when buying temporary bonds. simultaneously with the program of raising interest rates and tightening financial conditions to curb inflation.

Standard 10-year Treasury yield

was close to 4% on Friday, up from the 2.3% low of the year, according to Dow Jones Market Data.

The dizzyingly higher interest rates have rocked financial markets this year as the Fed has struggled to contain inflation that is holding near a 40-year high. US stocks fell on Friday, with the Dow Jones Industrial Average

down about 330 points, or 1.1%, and the S&P 500

down 2% and the Nasdaq composite

2.6% lower.


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