Feds Treasury support call irks traders - FT.

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April 14, 2015 5:37 pm

Feds Treasury support call irks traders

Michael Mackenzie in London and Robin Wigglesworth in New York

A warning about turbulent trading in US

government bonds by a senior Federal Reserve
official has highlighted tensions between
regulators and dealers that transact in the
worlds largest fixed income market.
Late on Monday, Simon Potter, head of the
Federal Reserve Bank of New Yorks Markets
Group, told a gathering of primary dealers, who underwrite the nations regular debt
sales, that further sudden swings in bond prices would become more common.
EPA

He called for Treasury dealers to act as good citizens and

stressed their role in supporting the $12.5tn market during volatile periods such as the
one in October, when prices swung wildly in a matter of minutes.
Many in the Treasury market say maintaining overall liquidity or the ease with which
bonds can be sold has become onerous in recent years against the backdrop of a
tougher regulatory and operating environment.
Mr Potter told dealers: Whether a firm has a large position, or represents a sizeable
share of market activity, it has the responsibility to help support market functioning and
liquidity.
Making significant changes to either such a position or trading activity could disrupt
market functioning and liquidity if not done with care, and the Treasury Market
Practices Group calls for such positions and activity to be managed with particular
vigilance.
His words rankled with some dealers, who have been cutting staff amid lower market
volatility, increased automation and higher capital costs.
Meanwhile, the central banks massive bond purchases via several rounds of quantitative
easing have removed some $2.5tn of Treasury debt from the market, harming liquidity,
according to dealers.
John Brady, managing director at RJ OBrien, said banks and trading firms had to
answer to their shareholders in the course of conducting their market making activities
unlike the Feds balance sheet, which is backed by taxpayers.

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Feds Treasury support call irks traders - FT.com

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I think he [Mr Potter] is saying that its OK to stand in front of a runaway train, he said.
Thanks to the Feds QE, the rise of much larger asset managers, with huge global
demand for US government bonds, had compromised liquidity in the Treasury market,
Mr Brady added.
The sandlot has got smaller, while the players have become bigger.
Evidence of this can be seen in how the share of Treasury coupon auctions awarded to
dealers in the past 10 months has fallen below 40 per cent from nearly half as investors
have sought more bonds.
US regulators continue investigating the reason for Octobers dramatic swing in Treasury
prices, which illustrated how the worlds largest government bond market was not
immune to sudden bouts of illiquidity.
Liquidity is important to the market place and it has deteriorated, said one trader. QE
extracted liquidity and we are going to see a repeat of volatility bouts like last October.
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