Oct 24 (Reuters) – The U.S. Treasury is taking steps to strengthen the resilience of the Treasury debt market and personal cash market and bond funds, however the U.S. monetary system is functioning nicely regardless of elevated world volatility, Treasury Secretary Janet Yellen mentioned on Monday.
Yellen, chatting with the Securities Trade and Monetary Markets Affiliation’s (SIFMA) annual assembly in New York, acknowledged that liquidity within the huge Treasuries market has diminished, elevating prices, however this and different elements of the U.S. monetary system haven’t been a supply of economic instability.
“It is not surprising that in a world of elevated volatility that liquidity ought to diminish considerably or the price of transacting would possibly rise a little bit, however my evaluation is that markets are nicely functioning, buying and selling volumes are giant, merchants are usually not having issue executing trades,” Yellen mentioned.
Yellen mentioned that her division was wanting rigorously at steps to enhance Treasury market functioning, noting that the capability of broker-dealers to intermediate available in the market has not grown consistent with the market’s dimension lately.
“So we’re wanting on the variety of methods to enhance resilience, ensure that intermediation is obtainable, improve oversight of buying and selling venues, enhance the transparency and have higher information on markets,” Yellen mentioned, with out detailing particular steps.
An index of near-term volatility within the Treasury market from ICE/Financial institution of America Merrill Lynch is close to the best degree for the reason that spring of 2020 when market dislocations throughout the early days of the COVID-19 pandemic compelled the Federal Reserve to step in to revive order.
Yellen in ready remarks cited this and different episodes of stress as underscoring the necessity to enhancing resilience.
“Treasury is working with monetary regulators to advance reforms that enhance the Treasury market’s capability to soak up shocks and disruptions, reasonably than to amplify them,” Yellen mentioned.
MONEY MARKETS, BOND FUNDS
Greater market volatility additionally may expose vulnerabilities in non-bank monetary intermediation, Yellen mentioned.
She added that Treasury and monetary regulators are working to raised monitor leverage in non-public funds and to “develop insurance policies to scale back the first-mover benefit that would result in investor runs in cash market funds and open-end bond funds.”
Yellen cited stresses in cash market funds throughout the 2008 monetary disaster and once more in March 2020 as the rationale for the Securities and Trade Fee’s new proposed guidelines to enhance resilience and transparency within the $5 trillion cash market sector.
“Open-end bond funds have an analogous subject of promising day by day liquidity whereas holding property the place, when there are hearth gross sales, there will be stresses in relation to liquidating the underlying property,” Yellen mentioned.
She additionally mentioned that Treasury was starting to watch hedge funds extra intently to realize perception into their leverage, concentrated positions and position within the turmoil of March 2020.
Reporting by David Lawder; further reporting by Chris Prentice; Modifying by Paul Simao and Andrea Ricci
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