Can the Fed Fix the Treasury Market by Tweaking Repo?

The $21.7 trillion Treasuries market is the bedrock of the global financial system. It’s not good when bedrock shivers, let alone shakes! But bouts of Treasuries turmoil have been happening more frequently and at times triggering large-scale interventions from the U.S. Federal Reserve. Pandemic-sparked volatility in March 2020 caused liquidity in the world’s biggest bond market to plunge, pushing the Fed to pour in more than $100 billion a day through debt purchases. More than a year later, the Fed announced the creation of what’s known as a standing repo facility, a step meant to head off future turmoil. A few hours earlier, a panel of former top global policy makers had called for the creation of such a facility, along with other measures to shore up the Treasuries market.

There are lots of reasons. One, because it’s estimated that the value of more than $50 trillion in assets around the globe are priced off Treasuries. So turmoil in government debt markets can have ripple effects on other asset classes, creating volatility that may push investors to run to the safety of cash. Beyond that, the U.S. government has had to ramp up sales of debt, which has surged by about 50% since late 2017, to finance a growing budget deficit that then ballooned to fund coronavirus-relief spending.