Fed Official Wonders Whether Treasury Market Can Handle Massive Issuance Alone

BY Dow Jones & Company, Inc. | ECONOMIC | 10/14/20 06:32 PM EDT By By Michael S. Derby

The Federal Reserve's point man on financial regulation said the Treasury market has grown so large that some level of central bank involvement may need to continue to ensure orderly trading conditions.

Randal Quarles, the Fed's vice chairman for supervision, was discussing the outlook for the central bank's $120 billion-a-month in purchases of Treasury and mortgage debt. Those purchases ramped up in March as the central bank responded to market and economic stress caused by the coronavirus pandemic.

The functioning of financial markets has improved since the tumult earlier in the year, raising questions about whether the Fed could pull back on its asset purchases, even as it has shown no indication it plans to do that.

Mr. Quarles said the Fed may have to remain engaged in asset buying for some time simply because financial markets are dealing with too many Treasurys to handle on their own. Total public debt now stands at just under $27 trillion, up from $23 trillion in this year's first quarter and $9.4 trillion in the first quarter of 2008, when the financial crisis was in full swing and the government was about to engage in a long-running surge in borrowing.

"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," Mr. Quarles said in a virtual appearance before an event at the Hoover Institution.

It isn't clear if the financial firms and other entities involved in the Treasury market can expand quickly enough to contend with the rise in outstanding government debt, Mr. Quarles said.

And that raises the question, "Will there be some indefinite need for the Fed to provide, not as a way of supporting the issuance of Treasurys, but as the way of supporting a functioning market in Treasurys, to participate as a purchaser for some period of time?" the official said.

"I haven't concluded that's the case, the [Fed] certainty hasn't concluded that's the case, but I do think it's an open question," Mr. Quarles said.

For now, Fed asset purchases serve the dual role of market support and stimulus provider as they help keep borrowing rates low. But with a still uncertain economic outlook, and the lack of clarity over broader government aid for the recovery, many believe that any future path of Fed stimulus might entail even more bond buying.

That means the Fed has some time to figure out whether the Treasury market can stand on its own. But it also runs the risk of markets being dependent on the central bank's presence.

Write to Michael S. Derby at michael.derby@wsj.com

  (END) Dow Jones Newswires
  10-14-20 1832ET
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