This is not a QE or QT. This is not any of those. Why is the US Treasury exploring debt buybacks

The US Treasury said Friday it plans to start talking to primary dealers in late October about the possibility that it could begin buying back some of its old debt to help avoid disrupting market functions.

The plan, if adopted, would mark a milestone in the roughly $22.6 trillion US government bond market, the world’s largest, by providing a new Treasury tool to aid market liquidity, a growing concern.

We see: Yellen of the Treasury was concerned about the “loss of sufficient liquidity” in the US government bond market

The proposal comes after the Bank of England was forced to intervene with a currency Emergency program to buy government debt temporarily And to give UK pension funds more time to offload bad bets. The volatility erupted as global central banks fought rising inflation by ending the easy monetary policies that had prevailed for most of the past decade.

Importantly, unlike the UK, the new Treasury proposal is separate from the Federal Reserve’s plans to sharply reduce the size of its balance sheet by allowing Treasuries and mortgages to roll at maturity, a process known as “quantitative tightening”. (qt), after hitting A record size of nearly 9 trillion dollars Less than two years of quantitative easing (QE).

“This isn’t QE or QT. It’s not either of those,” Thomas Simmons, Jefferies money market economist, said in a phone interview. This is far from an advertisement. It’s like a fact-finding.”

However, Simons said that if the plan is formed, it could help improve liquidity “where it is not very good.”

How Treasury buybacks can work

The Treasury asked traders for comments by Monday, October 24, on a new tool to buy back its unlisted securities each year, and whether it would “helpfully improve liquidity,” reduce volatility in the issuance of Treasury bills and help address other markets. Fears.

The idea would be to cement the “junk supply” of uncirculated securities that could become more difficult to trade once they were replaced by newer Treasury issues, or current securities.

“It’s a program to manage supplies, really, throughout the year,” Simons said of the Treasury’s proposal. “It appears to be a tool that they can use in the long term and is aimed at liquidity where it is weak.”

The Treasury Department meets quarterly with the community of traders to obtain feedback on the market’s performance over the years. Repurchases have been discussed previously Meetings in August 2022 And the February 2015.

Is a UK-style debt crisis brewing in the US?

The Fed began accelerating the pace of shrinking its balance sheet this fall, by allowing more of the bonds it holds to mature. It is also no longer an active participant in the secondary market for treasury securities, which has raised concerns about potential ruin and who might come forward as a major buyer.

Read: The next financial crisis may already be maturing – but not where investors expect

Stephen Stanley, chief economist at Amherst Pierpoint Securities, said that while the Fed’s holdings of Treasuries would be considered off-market, the Treasury proposal “would have absolutely nothing to do with what the Fed is doing” to shrink its balance sheet. Market monitoring.

Stanley said the recent volatility in the UK gold bond market may have been an incentive for the US Treasury to put buybacks back on the agenda, but he also wasn’t worried that it would reappear as a topic of discussion.

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

Jefferies’ Simons went further, arguing that if the Bank of England had a parallel and separate counterpart, such as the US Treasury, it might not have faced such a “negative reaction from the markets”, when it began buying temporary bonds. The program at the same time it was working to raise interest rates and otherwise tighten financial conditions to curb inflation.

Standard 10-Year Treasury Yield TMUBMUSD10Y,
It was at 4% on Friday, the highest level since October 15, 2008, after rising for 11 consecutive weeks, according to market data from Dow Jones.

Sharply higher interest rates shocked financial markets as the Federal Reserve tamed inflation near a 40-year high. US stocks closed lower on Friday, with the Dow Jones Industrial Average, the Dow Jones Industrial Average,
of 403 points, or 1.3%, and the S&P 500 SPX,
down 2.4% and the Nasdaq Composite Index,
3.1% less.

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