Hearing Entitled: Examining Treasury Market Fragilities and Preventative Solutions

2025-05-15

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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.

Frank D. Lucas

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.

Brad J. Sherman

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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