The $13.3 trillion market for U.S. government debt is showing more cracks as bond dealers are getting stuck with Treasurys they can’t sell, according to a report.
The twenty-two
primary dealers that are required to participate in auctions of federal debt held more Treasurys in February than at any time in the past two years,
Bloomberg News reported, citing data from the Federal Reserve Bank of New York.
The jump in holdings likely indicates that investors including central banks are dumping the debt on the firms, said JPMorgan Chase & Co. strategist Jay Barry. Foreign official accounts sold a record-setting net $105 billion of the securities in December and January, Treasury Department data cited by Bloomberg show.
“The liquidity providers right now are getting the short end of the stick, Scott Buchta, head of fixed-income strategy at Brean Capital LLC in New York, told Bloomberg. “It’s harder for dealers to offload these securities because the market depth just isn’t there.”
Primary dealers’ holdings of Treasurys reached as high as $121 billion last month, the most since October 2013 and up from about $9 billion in July of last year. They held $111 billion as of March 9, almost double the average for the last five years, according to the New York Fed.
Bond bulls shouldn’t worry yet, though.
Stress on the system didn’t slow the rush into U.S. government debt this year. Treasurys that mature in periods longer than a year have gained 1.7 percent in 2016 as stocks slumped amid concern global economic growth was cooling, Bloomberg Treasury bond index data show. The S&P 500 has since rebounded from the February sell-off.
But George Goncalves, head of rates research at primary dealer Nomura Securities Inc. in New York, said in a research note that dealers already holding debt may have less capacity to absorb more rounds of selling in the future.
“If there is another round of bond selloff, the market will need real-money support to keep everything orderly,” he said in a March 17 reported cited by Bloomberg.
Treasury yields rose on Monday after two Federal Reserve officials
said inflation was likely to accelerate, which would lead the central bank to hike rates as a way of putting a brake on the economy.
Richmond Fed President Jeffrey Lacker said inflation was likely to reach the Fed's 2 percent target in the next couple of years,
Reuters reported.
San Francisco Fed President John Williams told Market News International that he would advocate for another interest rate hike as early as the April meeting, noting "very encouraging" progress in inflation.
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