Regulators want to prevent future explosions in treasury bills. An idea is popular.


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Federal Reserve Chairman Jerome Powell.

Kevin Dietsch / Pool / Getty Images

More than a year after the pandemic, U.S. officials are looking for ways to prevent Treasury market explosions like the one that occurred last year.

Popular idea emerges from debate over hedge funds or banking regulations: Officials want it easier for foreign governments to swap treasury bills for cash in a crisis without having to unload securities .

Regulators, including the Bureau of Financial Research, identified the sale of US bonds by global investors as a major driver of T-bill volatility at the start of the Covid-19 pandemic, as they rushed toward US dollars and bonds. Foreign public sector investors sold $ 147 billion worth of their treasury bills last March, nearly 3.5% of their holdings, according to Treasury Department data.

In fact, the Federal Reserve has already created a vehicle to help provide dollar liquidity to these investors. It’s called the Temporary Foreign and International Monetary Authority’s Pension Facility, or FIMA Pension Facility, and was announced on March 31, after the global race for liquidity at the start of the Covid-19 pandemic tipped over Treasury yields in a big drift.

The facility is expected to expire at the end of September, but authorities are now considering making it permanent. And this change seems to have a lot of support.

“In their discussion of the considerations of setting up a permanent FIMA pension facility, a large majority of participants saw the potential benefits as outweighing the costs,” according to the minutes of the Fed meeting. “A few participants noted that if a FIMA repo facility had been put in place in March 2020, it would likely have significantly alleviated the pressures in these markets caused by the sudden need for dollar funding overseas.”

The FIMA facility allows “world central banks and other foreign monetary authorities” to enter into repurchase agreements with the Fed, which essentially allows them to pledge their treasury bills to the Fed and receive dollars at a predetermined interest rate.

At the Treasury’s last payback meeting, its private sector advisory group, the Treasury Borrowing Advisory Committee, or TBAC, assessed a different proposal: a facility for a wider range of U.S. investors to enter into buyout deals. similar with the Fed.

Such a facility “would allow dealers to confidently respond to the increased demand for liquidity in times of stress” and “would reduce the intensity of the race for cash by investors, as UST funding would be reduced. insured, although at penalty rates, ”the TBAC found. The committee found that while a permanent pension facility would have offset some of the pressure from the sale of Covid-19, it likely would not have eliminated the need for further action by US officials.

Fed officials also seem to agree on the potential benefits of a permanent pension facility. At the April central bank meeting, “a substantial majority of participants felt that the potential benefits of a properly calibrated facility outweighed the potential costs,” the minutes said.

Again, that doesn’t mean it would be a panacea. Officials also highlighted the risk that a facility could be seen as a safety net for nonbank financial institutions, such as hedge funds, which have become more important in the market, and said it would be important to do so. Exercise caution when determining the price of the facility, guarantees the eligibility and identity of traders who may participate.

Yet “almost all [FOMC members] commented that a permanent repo facility, by acting as a safety net, could help deal with pressures in the US Treasury securities and US Treasury repo markets that could spill over into other funding markets and undermine the implementation and transmission of monetary policy, ”the minutes said.

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