The U.S. Treasury market still runs the risk of abrupt freezes in liquidity like the one seen in March and April, as the COVID-19 pandemic roiled the financial system, a member of the Federal Reserve Bank of New York's Market Committee said on Friday.
The market shock in March, which helped drive yields across maturities to all-time lows, was"truly an exceptional event," Lorie Logan said in a speech to the Brookings-Chicago Booth Task Force on Financial Stability."However, while it is tempting to dismiss it as a once-in-a-lifetime shock, it is important to take time to reflect and assess if lessons can be learned that could make the Treasury market even more resilient to future shocks.
The major sellers were mutual funds, which sold off more than US$200 billion of their Treasury holdings in the first quarter, foreign accounts, which sold off roughly US$161 billion between February and April, and hedge funds. But primary dealers currently hold even more Treasury debt than they did at the beginning of the pandemic, and could, in the event of another bout of forced selling, face the same problem absorbing all the Treasury supply on offer.