TMPG: US Treasuries supply may strain market makers; Fed guidance a concern

Dan Barnes

Newly released minutes from the Federal Reserve’s Treasury Market Practices Group, an industry-led advisory body on market structure and trading, has indicated concern about the level of US government bond issuance and the capacity of dealers to intermediate their activity.

In the TPMG’s May meeting members cited ongoing frictions in markets within its purview. One of these was the heavy issuance from the US Treasury, which was cited as a potential risk to market functioning. It was noted by members that the Federal Reserve might not provide sufficient clarity on forward plans or might pull back accommodation too soon.

Members also emphasised the importance of decreased dependence on the availability of the Fed’s balance sheet and the return of “unaided dealer intermediation” as a measure of success for future Fed interventions.

In the June meeting, the last before summer, an overarching theme of discussion among members was the potential future impact of Treasury issuance on market functioning and Treasury yields. In this instance members noted that issuance of debt by the Treasury was expected to outpace Federal Reserve purchases in the second half of the year.

This would bring the ability for banks and broker dealers to serve as intermediaries “in focus” as issuance increases, suggesting potential strain.

The minutes also disclose that the potential negative impacts of increased forbearance requests on agency mortgage-backed securities (MBS) performance are expected to be less than had been initially projected, with members and did not view forbearance as a likely source of future MBS market disruptions.

Concerns were raised regarding the TMPG fails charge recommendations with respect to agency commercial mortgage-backed securities (CMBS). One member of the New York Fed informed members of reports that market participants “may not be uniformly applying the fails charge best practice recommendation for agency CMBS, which is addressed in the TMPG Fails FAQs”.

Members also queried the uniformity of application of the fails charge recommendation on Treasury securities transactions settling outside the US. They agreed to a survey of member firms on both fails-related topics in the intermeeting period, with anonymized results to be shared with the Group by the TMPG secretariat.

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