Bloomberg News

Treasury Asks Dealers for Comment on Policy Changes, Swaps

January 18, 2013

The U.S. Treasury Department asked bond dealers for their views on how policy and regulatory changes are affecting the government-debt market as part of its regular survey ahead of quarterly meetings and auctions.

The Treasury, in a questionnaire sent today, asked for comment on the “current drivers of supply and demand in the Treasury bill and repo markets” and “to what extend are pending policy and regulatory developments” are impacting trading. Dealers were also asked how derivative registration and new reporting requirements affect the interest-rate swap market and whether there is any notable impact on the Treasury market.

Regulatory changes that may affect the Treasury market include Basel III liquidity requirements, the prospect of adjustments being put in place to reduce risk in the U.S. money market industry, as well as the Federal Reserve’s efforts to reduce the risk associated with the tri-party repurchase agreement market. Basel’s so-called liquidity coverage ratio, or LCR, is aimed to help ensure banks have a sufficient buffer of liquidity for use in a financial crisis.

“There has been a drift lower in repo rates this year,” said Thomas Simons, a government-debt economist in New York at Jefferies & Co., one of 21 primary dealers that act as counterparties with the Fed on open market operations and bid at Treasury auctions. “We are also inching closer to a lot of the swap regulations being implemented, so they want to see how dealers expect the Treasury market to react.”

Twist Ends

The rate to borrowing and lending Treasuries in the repurchase agreement, or repo, market fell by more than half this month as unlimited government insurance on some bank accounts expired, potentially boosting demand for government debt as an alternative, and the Fed ended short-term debt sales under what became known as Operation Twist.

The dealer survey is for Jan. 31-Feb. 1 meetings between Treasury officials and bond dealers in advance of the government’s quarterly auctions of notes and bonds. The government’s next so-called quarterly refunding announcement is scheduled for Feb. 6.

There was about $1.6 trillion in cash as of last quarter sitting in non-interest bearing transactions accounts with balances above $250,000 that in January lost temporary insurance coverage put in place in 2008. The unlimited insurance was part of the Transaction Account Guarantee program, or TAG, implemented by the Federal Deposit Insurance Corp. in 2008 and extended by the Dodd-Frank Act in 2010 as a way to shore up banks during the financial crisis.

Swap Legislation

The overnight Treasury repurchase agreement rate, measured by the Depository Trust & Clearing Corp. general-collateral finance repo index, was 0.118 percent yesterday, compared to an average in the fourth-quarter of 0.25 percent and as high as 0.526 percent on Oct. 29.

Demand for government debt may rise as margin requirements on swaps required by the Dodd-Frank Act are put in place, given the need for high-quality capital, according to Bank of America Corp.

Under the 2010 Dodd-Frank changes, dealers and money managers that trade swaps will need to find cash and securities to back the trades. Under Commodity Futures Trading Commission rules, clearinghouses are required to collect initial margin, the minimum amount of cash or eligible securities investors must deposit to cover the risk of default.

Debt Ceiling

Dodd-Frank requires swaps be moved to central counterparties to limit the kinds of risks that fueled panic during the 2008 credit crisis.

Unlike the fall in repo rates, those on short-term Treasury bills maturing around the time the U.S. is forecast to run out of money to pay its obligations have risen amid concern lawmakers may fail to agree to lift the debt ceiling.

The Treasury reached its statutory borrowing limit on Dec. 31 and is using “extraordinary” measures to pay for the government. It will lack sufficient funds to pay all its bills as early as Feb. 15, according to the Washington-based Bipartisan Policy Center.

The one-month Treasury bill rate rose to as high as 0.08 percent on Jan. 16, from about zero at the end of last year.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editors responsible for this story: Kevin Costelloe at kcostelloe@bloomberg.net; David Liedtka at dliedtka@bloomberg.net


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