Hearing Entitled: Examining Treasury Market Fragilities and Preventative Solutions

Committee on Banking and Currency

2025-05-15

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Source: Congress.gov

Summary

This meeting of the Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity focused on examining fragilities within the Treasury market and exploring preventative solutions [ 00:16:26-00:16:39 ] . Participants underscored the critical importance of a highly liquid and resilient Treasury market for the global economy, particularly in light of recent volatility [ 00:17:27 ] . The discussions aimed to use recent market stress as a case study to identify potential improvements for market resilience [ 00:17:07 ] .

Themes

Recent Treasury Market Volatility

The meeting discussed last month's market volatility as a key case study, noting a rapid decline in liquidity and a significant jump in the 10-year yield over a three-day period [ 00:17:47 ] . This stress was attributed to policy uncertainty, specifically President Trump's tariff announcements, which led to questions about future growth, inflation, and interest rates . Other contributing factors included rising inflation expectations, hedge funds unwinding swap cash basis trades, and dollar weakening suggestive of foreign capital outflows . While indicators of market functioning deteriorated, the market ultimately proved resilient and recovered quickly after some uncertainties were resolved [ 00:17:53 ] . Panelists highlighted that the market did function, albeit with price movements, and did not escalate into a full crisis like the COVID-19 shock, as funding markets held up well .

Importance of Treasury Market Resilience

A resilient and liquid Treasury market is fundamental not only to the U.S. capital markets but also to global markets, playing a key role in monetary policy, pricing assets, and financing the government at low cost . Speakers emphasized the necessity of safeguarding this asset and learning from past stress episodes in 2014, 2019, and 2020 [ 00:17:57 ]

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. Maintaining the Treasury's status as the world's premier safe haven asset and anchoring dollar dominance requires expanding intermediation capacity and continually improving market resilience .

Role of Central Clearing

The SEC's mandate for central clearing of cash transactions and repurchase agreements involving Treasuries was identified as a fundamental shift and a significant effort to enhance financial stability [ 00:18:19-00:18:23 ]

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. This measure is expected to reduce counterparty credit risk, improve market efficiency, and strengthen the Treasury market . There was broad consensus among the panelists on the importance of this rule, with calls for timely and proper implementation, ensuring a level playing field and consistent margin practices [ 00:18:32 ]

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.

Impact of Regulatory Constraints (SLR/ESLR)

The Supplemental Leverage Ratio (SLR) and Enhanced Supplemental Leverage Ratio (ESLR) were a significant point of discussion regarding their potential adverse consequences on market participation and intermediation [ 00:18:42 ]

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. Several speakers argued that these ratios disincentivize banks from holding safe assets like Treasuries and reserves, thereby limiting their capacity to provide liquidity, especially during stress [ 00:18:49 ]

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. Proposals included targeted adjustments or exemptions for Treasuries from these ratios [ 00:18:42 ]

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. However, one panelist countered that eliminating capital requirements for Treasuries, given heightened price volatility, would be a risky solution inconsistent with sound risk management, potentially threatening bank solvency .

Growing National Debt and Fiscal Responsibility

The increasing national debt, which has doubled and is projected to reach $52 trillion in ten years, was highlighted as a major concern impacting market resilience . Speakers stressed that unsustainable deficits raise the cost of funding for the government and affect investor confidence . There was a strong call for fiscal sustainability and bringing down the deficit to avoid potential issues like stagflation and banking crises . The risk of default due to debt limit crises was also noted as a factor that diminishes foreign perception of U.S. Treasury safety and soundness .

Market Structure Evolution & Capacity

The Treasury market's growth, now at $29 trillion outstanding, has outpaced the intermediation capacity of market participants . Discussion points included the need for dealers to maintain their ability to intermediate and the growing role of high-frequency trading firms, which can create an "illusion of liquidity" . Suggestions for expanding market capacity included encouraging "all-to-all" trade on platforms beyond dealers, which could increase competition and resilience . Other solutions involved faster and more reliable ways to exchange Treasury securities for cash, such as discount window modernization and options for early and intraday repo .

Tone of the Meeting

The meeting conveyed a serious and analytical tone, driven by concerns about recent market volatility and the long-term health of the Treasury market [ 00:17:14 ] . While panelists largely agreed on the importance of market resilience and certain technical solutions like central clearing, there were discernible differences in opinion, particularly regarding the appropriate adjustments to bank capital regulations and the broader fiscal policy . The discussion acknowledged the complex interplay of macroeconomic factors, regulatory frameworks, and geopolitical events shaping market dynamics, with a general consensus on the necessity of proactive measures to ensure continued stability and the U.S. dollar's reserve currency status . Some partisan remarks were made regarding the origins of recent volatility and proposed fiscal policies .

Participants

Transcript

The Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity will come to order.  Without objection, the chair is authorized to declare a recess of the committee at any time.  Without objection, all members will have five legislative days within which to submit extemporaneous material to the chair for inclusion in the record.  I'd now like to recognize myself for four minutes for an opening statement.   This hearing is entitled Examining Treasury Market Fragilities and Preventative Solutions.  Today, we'll take a 30,000-foot view of Treasury market structure with a particular focus on the market under stress.  We will endeavor to use last month's volatility as a case study in current market conditions and functioning and examine what changes may have been helpful in improving the resilience of the market.   We can't overstate the importance of this topic.  A highly liquid and resilient Treasury market is fundamental to the global economy.  There have been a number of episodes in recent years that have made us remember the enormous privilege we have of being the world's global reserve currency and boast safe haven asset status.   Last month was one of those moments.  We observed almost every measure of liquidity in the Treasury market decline rapidly over a three-day period.  Thankfully, the market is resilient and recovered quickly from the stress of the broader macroeconomic uncertainty.  But challenges like last month remind us that we must safeguard our most important asset – our deep, liquid, healthy sovereign debt market.   We can bolster the resilience of the market by learning lessons from market stress we observed in 2014, 2019, 2020, and a few weeks ago.   My, it seems relevant, doesn't it, when you think about that?  For example, in 2023, the SEC voted to mandate central clearing for cash transactions and repurchase agreements involving treasuries.  This is a fundamental shift and a massive undertaking by market participants.  I've been working with the SEC to ensure that firms have appropriate time to come into compliance.
Similarly, we need to get implementation right.  There are outstanding questions that need to be addressed and Chairman Atkins is well positioned with broad stakeholder feedback to clarify the rule's execution.  I have also repeatedly urged the Prudential Regulators to exempt Treasuries and Reserves from the Supplemental Leverage Ratio and the Enhanced Supplemental Leverage Ratio due to their low-risk nature.  We should incentivize participation in the market, not make it cost prohibitive.   The Treasury market has doubled in size since I was on the Dodd-Frank Conference Committee.  We should reconsider some of the provisions enacted that may have had adverse consequences and that disincentivized participation in financing our debt.  In the last decade, we've seen a dramatic change in buyers of Treasuries.  Some of this is positive.  Innovation is driving demand.   On the other hand, we should look carefully at what is causing some investors to leave the market.  Our debt instruments need to retain their attractiveness to a broad array of participants.  And I want to make it clear, there is no silver bullet here.  The Treasury market will always be sensitive to macroeconomic challenges.  But there are changes we can consider to improve this resilience.   I hope to work with my colleagues on both sides of the aisle to address these constraints.  And with that, I yield back.  The chair now recognizes the ranking member of the subcommittee, Mr. Vargas, for four minutes for an opening statement.
Thank you very much, Mr. Chairman, and thank you for forming such an excellent panel.  And I want to thank the witnesses for being here today.  Thank you to each and every one of you.  A resilient and liquid Treasury market is critical not only to the functioning of our own capital markets, but also   to the functioning of markets around the world.  The Treasury market plays a key role in the Fed implementing its monetary policy, provides the benchmark risk-free rate for pricing other assets, and finances our government at a low cost to the taxpayers.  So last month, when the Treasury market experienced volatility in the wake of President Trump's Liberation Day, it was no surprise that many expressed alarm about the financial consequences surrounding the tariffs.   We saw the 10-year yield jump more than 50 basis points, which represented the largest three-day jump since 2001.  And as this administration continues to publish policy edicts through Truth Social, a number of analysts have signaled concern that the market volatility is here to stay.  Even though we did see relatively strong demand in the Treasury's auctions of 10-year and 30-year bonds following the initial movement in the market, all this uncertainty   makes maintaining resiliency all the more important.  But growing uncertainty isn't the only reason it's pivotal to shore up the strength of our Treasury market.  The growth in existing Treasury market debt has brought new attention to the issue of resilience.  And this growth is on track to continue.

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