- The Treasury market may no longer be able to function properly without the Federal Reserve’s intervention, according to Randal Quarles, vice chair of supervision at the central bank.
- The surging US debt pile forecasts a long period of increased bond issuance. The Fed’s purchasing of roughly $US80 billion of Treasurys a month has bolstered the market through the supply glut.
- The “sheer volume” of debt set to hit the market “may have outpaced the ability of the private-market infrastructure to kind of support stress of any sort,” Quarles said.
- It’s an “open question” whether the central bank will need to provide support indefinitely as Treasury issuance soars, he added.
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The Treasury market can no longer stand on its own, and the Federal Reserve might need to provide support for the foreseeable future, said Randal Quarles, vice chair for supervision at the central bank.
The Fed has been lifting the market since March to keep liquidity flowing and ensure stability through the coronavirus pandemic and nationwide recovery. Purchases of roughly $US80 billion of Treasurys a month have kept yields low even as unprecedented relief spending spikes the US budget deficit and brings a flood of new debt to market.
Yet economists fear what may happen when the central bank slows its pace of buying. With the government set to maintain hefty issuance for years, the Fed’s support could be necessary to avoid a complete Treasury market collapse, Quarles said.
“It may be that there is a simple macro fact that the Treasury market, being so much larger than it was even a few years ago, much larger than it was a decade ago, and now really much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private-market infrastructure to kind of support stress of any sort there,” he said in a virtual appearance on Wednesday.
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Public debt surged through the year as Congress passed the $US2.2 trillion CARES Act and other stimulus measures to pad against the pandemic recession. The total now sits at more than $US26 trillion, up from $US23 trillion before COVID-19 slammed the US.
It’s an “open question” whether the Fed will need to provide support indefinitely to the Treasury market, Quarles said. Such a buffer shouldn’t necessarily incentivise new issuance, but instead ensure the steady supply of new bonds doesn’t flood the market with unwanted debt, he added.
The Federal Open Market Committee signalled in September that it may discuss the future of its asset-purchase program when it convenes next month. The statement, while vague, suggests members are open to increasing the purchases to further bolster the Treasury market. A decrease in the pace of bond purchases is unlikely, especially as coronavirus cases trend higher throughout the US and the nation’s economic recovery slows.
The FOMC will next meet on November 4-5.
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