(Bloomberg) -- Central banks were likely one of the actors behind a selloff in U.S. Treasuries during the height of the Covid-19 financial strains in the spring, according to the Federal Reserve’s top official for supervision.
“Sales by foreign central banks were a significant source -- I think right now we would say that it was a more significant source than the unwinding of leveraged hedge fund positions,” Fed Vice Chair Randal Quarles said in answering questions on a panel at a virtual investment conference Tuesday.
Trading in Treasuries, the world’s largest government bond market, turned volatile in March as investors dumped off-the-run securities -- those that are no longer benchmarks, such as 10-year or two-year notes -- in volumes larger than dealers could move. Unusually, 10-year Treasuries, usually a haven asset, slumped in mid-March even amid an exodus from risk, as liquidity in the market dried up. The Fed responded on March 15 by announcing it would purchase $500 billion of U.S. Treasuries. Two days later it opened the Primary Dealer Credit Facility to backstop the market’s brokers.
Quarles said further investigation is needed to determine what happened during the strains, which prompted the Fed to step up its provision of liquidity in March.
“There was a certain element of pressure from the regulatory framework that limited the ability of some of the dealers to expand holdings given the dash for cash -- I don’t know that that was significant,” Quarles said.
Quarles said the Financial Stability Board, an international group that monitors the global financial system, is compiling a report on the market strains seen in March. That will be released around the time of Group of 20 meetings in October and November, he said.
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