Dealers Shed More Than $80 Billion in Treasuries in Two Weeks

Dealers aren’t hanging around to find out whether regulatory exemptions that benefit the $21 trillion Treasury market will expire or not at the end of this month -- they are exiting it en masse.

Treasury holdings at primary dealers fell another $16.1 billion in the week to March 10, extending a record $64.7 billion decline the previous week, according to Federal Reserve data released Thursday. Holdings have dropped to their lowest since October 2018, with declines across much of the curve and only seven to eleven year maturities seeing an increase.

Dealers Shed More Than $80 Billion in Treasuries in Two Weeks

A Fed tweak to a rule in April exempted Treasuries and reserve balances at the central bank from lenders’ supplementary leverage ratios, one of a number of coronavirus relief measures. That allowed banks to expand their balance sheets with purchases of U.S. government bonds and increased the attractiveness of Treasuries, in particular over swaps.

“We doubt the dealer deleveraging is directly driven by the affected banks needing to sell Treasuries to adjust their capital ratios, but rather it is likely the dealer desks preparing for potential market volatility heading into March 31,” Jefferies economists Thomas Simons and Aneta Markowska wrote in a March 18 note to clients.

Some strategists have argued that the end of the relief would result in large rotations out of Treasuries, while others said it would have only a minor impact on the bond market. Zoltan Pozsar of Credit Suisse Group AG has said that the market shouldn’t fear mayhem if the exemption expires simply because the benefits from it were never really that dramatic in the first place.

At the press conference after the Federal Open Market Committee meeting Wednesday, Powell said “we’ll have something to announce on that in coming days,” when asked about the expiry.

Powell’s press conference, which conveyed a broadly dovish message about monetary policy, also helped spur a deepening of the selloff in Treasuries, with the 10-year yield rising as high as 1.75% Thursday, the highest level in over a year. It was around 1.69% in Friday morning trading in New York.

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