Yellen Worries Over Loss of ‘Adequate Liquidity’ in Treasuries

(Bloomberg) — Treasury Secretary Janet Yellen cited concerns about the potential for a breakdown in trading of US Treasuries, as her department leads an effort to shore up that crucial market.

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“We are worried about a loss of adequate liquidity in the market,” Yellen said Wednesday in answering questions following a speech in Washington. The balance-sheet capacity of broker-dealers to engage in Treasuries market-making hasn’t expanded much, while the overall supply of Treasuries has climbed, she noted.

Treasury debt outstanding has climbed by about $7 trillion since the end of 2019. But big financial institutions haven’t been as willing to serve as market-makers, burdened by the so-called supplementary leverage ratio, or SLR, which requires that capital be put against such activity, as well as against reserve holdings.

Yellen noted that the Federal Reserve now has a standing repurchase facility to provide a liquidity backstop to the Treasuries market; that “can be helpful,” she said. She also said that the so-called Group of 30 panel has presented some “good ideas” on reforms that would help strengthen the market, including the possible expansion of central clearing.

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