Yellen Flags Potential for Buybacks of Treasury Securities

(Bloomberg) — Treasury Secretary Janet Yellen flagged the potential for buybacks of certain US government securities, after her department quizzed market participants on the potential for the maneuver to improve liquidity in the market.

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“It’s something a number of” other governments “have done from time to time,” Yellen said in answering reporters’ questions after an event in New York Monday. “I don’t think it would be a main intervention tool we would use — but it’s conceivable that something could be done there.”

Yellen spoke a little over a week before the Treasury Department’s so-called quarterly refunding announcement, where it typically makes any tweaks to its debt-management policies. The refunding documents are expected Nov. 2.

Ahead of that announcement, the Treasury earlier this month asked primary dealers of US government debt for their views on the merits and limitations of a buyback program. The Treasury Borrowing Advisory Committee, a broad group of market participants, has recommended considering the move.

Yellen also acknowledged a relative lack of trading volume in 20-year bonds, a security that was reintroduced in 2020.

“The 20-year Treasury is an area, an issue where there’s been less liquidity — but we haven”t made any decisions about it,” she said.

In remarks earlier Monday to the Securities Industry and Financial Markets Association, Yellen said that the Treasury is “very focused” on the Treasuries market, where there have been episodes of illiquidity — where it’s more difficult to buy and sell some securities, particularly in larger amounts — in recent years.

Treasuries trading remains “robust” for now, but past stress underscored “the importance of enhancing its resilience,” she said.

The Treasury chief said in the speech that her department’s staff was “working with financial regulators to advance reforms that improve the Treasury market’s ability to absorb shocks and disruptions, rather than to amplify them.”

Treasury officials have been studying the issue for years, and are currently working on a proposal to boost transparency surrounding specific trades in the market.

Options under consideration include more central clearing. Many of the market-making financial institutions, meanwhile, would prefer an easing of regulatory constraints overseen by the Fed that force banks to set aside capital when they hold Treasuries on their balance sheet.

(Updates with context on refunding announcement in third paragraph.)