Source: Wall Street News

As the USA's debt approaches the 50 trillion dollar mark, the pressure on the "primary dealers," the guardians of U.S. Treasury securities, is increasing.

Primary dealers are an elite group composed of Wall Street Institutions, established in 1960 by the New York Federal Reserve Bank, aimed at ensuring the smooth running of the U.S. Treasury market. This system has now grown to nearly 29 trillion dollars.

On December 31, according to statements from primary dealers cited by Bloomberg, "We are facing increasing pressure in fulfilling our responsibilities."

Moreover, the market faces a critical risk: if repurchase rates unexpectedly spike again and dealers cannot intervene, hedge funds may not have adequately considered this risk, leading to rapid and severe deleveraging, which could ultimately prompt Federal Reserve intervention.

The USA's debt expansion is "unstoppable," and the primary dealers face "many difficulties" in their duties.

Primary dealers have indicated that their responsibilities in bidding for new debt in regular Treasury auctions and maintaining an active secondary market have become increasingly difficult, partly due to the capital and leverage limits set after the 2008 financial crisis.

Post-financial crisis regulations have increased the costs for Banks' affiliated traders to Hold government debt and weakened their market-making abilities, thereby promoting "market liquidity shortages" during turbulent times.

In addition to regulatory constraints on business, pressures in other areas have started to emerge. In key short-term financing markets, the intervention ability of Banks' affiliated traders is limited due to balance sheet constraints, leading to periodic spikes in key overnight interest rates. This situation occurred in 2019, and similar circumstances have emerged this September and are happening now at the year's end.

In September of this year, the overnight repurchase rate once surged to 5.9%. Now, overnight rates have risen to between 4.25% and 4.5%, outside the Federal Reserve's target range, and this situation has still occurred even after the Federal Reserve adjusted some tools for intervention this month.

Casey Spezzano, head of US client sales and trading at NatWest Markets, stated that the volume of Treasury issuance has nearly tripled in the past decade and is expected to nearly double to 50 trillion USD in the next decade, while traders' balance sheets have not grown on the same scale:

"You are trying to push more Treasuries through the same pipes, but these pipes have not gotten any bigger."

However, not only primary dealers but also many investment companies and former senior policymakers have expressed concerns that the US Treasury market might replay the "sell-off collapse" it experienced at the onset of the pandemic.

Regulatory agencies seem unable to stop US borrowing, with the amount of Treasuries held by dealers reaching a historic high.

Research from the US Treasury Borrowing Advisory Committee shows that the intermediary capacity of primary dealers (measured by the percentage of total Treasury positions and financing compared to the total market circulation) has steadily declined over the past decade, and if the current trend of soaring US debt continues, this capacity will decline further.

It is noteworthy that regulators seem unable to control the pace of borrowing in the USA. Some analysts predict that borrowing in the USA will experience exponential growth in the coming years, which may put pressure on primary dealers. For them, the question boils down to whether they can keep up with the surge in Treasury sales.

According to the latest data from the New York Fed, the amount of US Treasuries held by primary dealers has reached a historical high of nearly 400 billion dollars. In 2014, the average holding of dealers was 43 billion dollars.

Laura Chepucavage, head of Global Financing and Futures at Bank of America, stated that the current rise in debt, combined with regulatory considerations for dealers, is making the system inflexible and increases the potential for market turmoil. She said:

“From the perspective of liquidity provision, in the past, people could move to where it was needed, but now more considerations regarding how to trade and how to mediate in the market need to be taken into account. We must be able to prepare in advance and withstand market turmoil.”

编辑/jayden