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Treasury Buyback Plan Will Boost Market Resilience, US Debt Official Says

Liz Capo McCormick, Bloomberg News

(Bloomberg) — The resilience of the world’s biggest bond market is top priority as US debt officials prepare to start buying back government debt, according to Josh Frost, the Treasury Department’s assistant secretary for financial markets.

“Buybacks can play an important role in helping to make the Treasury market more liquid and resilient,” Frost said Thursday in a prepared speech during a forum on the Treasury market in New York. Our goal is to “ensure that the Treasury market remains the deepest and most liquid market in the world.”

The Treasury is expected in 2024 to start regularly purchasing its bonds for the first time in more than two decades, a move that comes after years of increasing scrutiny on Wall Street about the $25 trillion market’s underlying fragility. The programs have two separate objectives: to bolster liquidity in some pockets of the market and to smooth the volatility of bill issuance as it manages its cash balance.

Officials had been exploring the buybacks for at least a year and unveiled additional details on the structure last month. But market liquidity has drawn scrutiny since at least October 2014, when Treasuries convulsed — with no apparent trigger — in what was dubbed a flash rally. Some measures pushed through since 2014 include boosting public reporting on daily Treasury transactions. 

More recently, a near freeze of the market in March 2020 forced the Federal Reserve into massive purchases to prevent wider financial disruptions. That shock and other disruptions have led various regulators to seek improvements through an inter-agency working group.

©2023 Bloomberg L.P.

https://www.bnnbloomberg.ca/treasury-buyback-plan-will-boost-market-resilience-us-debt-official-says-1.1974656

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Planned debt buybacks not meant for periods of market stress, US Treasury official says

By Gertrude Chavez-Dreyfuss

September 22, 202312:54 AM GMT+8Updated 2 days ago

NEW YORK, Sept 21 (Reuters) – The U.S. Treasury’s planned buyback of its outstanding securities next year is aimed at improving liquidity in the bond market, but it is unlikely to ease periods of extreme financial stress, a senior official said on Thursday.

In prepared remarks for the International Swaps and Derivatives Association conference in New York, Assistant Secretary for Financial Markets Josh Frost noted the importance of maintaining flexibility in providing liquidity support to certain sectors of the Treasury market.

But Frost said he wanted to make it clear “at the outset that these buybacks are not intended to ameliorate periods of acute market stress.” Frost said unlike the Federal Reserve system, which can fund its bond purchases by creating reserves, each dollar of Treasury’s buybacks would have to be financed with a dollar of debt issuance as well.

“This limits our ability to rapidly increase the size of buybacks to a level potentially necessary to alleviate market stress without resulting in significant costs for the taxpayer,” Frost said.

Frost added that the corresponding rapid rise in debt issuance could significantly increase the Treasury’s financing costs in times of crises.
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Frost said debt buybacks can help improve liquidity in the bond market by providing a regular opportunity for market participants to sell back to Treasury off-the-run securities, which are older and less liquid, across the yield curve.

“This should improve the willingness of investors and intermediaries to trade and provide liquidity in these securities, all else equal, knowing there is a potential outlet to sell some of their off-the-run holdings,” Frost said.

Liquidity in the world’s largest bond market had been problematic for most of last year due in part to rising volatility as the Fed aggressively raised interest rates to bring down persistently high inflation.

The buyback program will also help Treasury’s cash management by reducing the volatility in its cash balance and bill issuance, he pointed out.

https://www.reuters.com/markets/rates-bonds/planned-debt-buybacks-not-meant-periods-market-stress-us-treasury-official-says-2023-09-21/#:~:text=Frost%20said%20debt%20buybacks%20can,liquid%2C%20across%20the%20yield%20curve

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