U.S. Treasury Buybacks

INTRODUCTION.
Good afternoon and thank you for having me here at the New York Fed’s annual primary dealer meeting. The U.S. #Treasury market is the deepest and most liquid market in the world. I’m glad to be here to speak with you, the primary dealers, because of the critical role you play in making this market that underpins the global financial system so deep and so liquid, both through your role as pro rata bidders in Treasury auctions and your market making capabilities.
The Treasury market serves as the benchmark risk-free #yield curve and as a source of safe and liquid assets for a broad range of investors. But its primary role is its reason for existing in the first place: financing the U.S. government. Because of the criticality of the Treasury #market, and in light of disruptions that have occurred in recent years, the official sector has been working together to enhance the resilience of the market. Much of this work has been coordinated through the Inter-Agency Working Group on Treasury Market Surveillance or IAWG, which is made up of staff from Treasury, the New York Fed, the SEC, the CFTC, and the Fed Board of Governors.
The IAWG’s work over the past three years has been structured as five workstreams,...
SEC CENTRAL CLEARING AND DEALER RULE,
TREASURY-LED INITIATIVES,
OFR Non-Centrally Cleared Bilateral Repo,
On-The-Run Transparency,
Treasury Buybacks,
I will turn now to a bit more detail on Treasury’s recent announcement on buybacks. The formal launch of Treasury’s buyback program coincided with the May quarterly refunding just last week. In the refunding policy statement, we announced that Treasury would conduct its first regular buyback operation in the four-week to two-year nominal coupon sector on May 29th. In this liquidity support buyback, we are willing to purchase up to $2 billion across 20 CUSIPs that will be announced closer to the operation. Before I discuss further details of our recent announcement, I’d like to share some of the history behind Treasury buybacks.
The idea of a sovereign #debt buyback is not new. In the Treasury market,...
At a high level, the “liquidity support” buybacks announced earlier this month share the same ultimate goal as the early 2000s buyback program: supporting Treasury market liquidity and market-functioning. However, the mechanism for liquidity support is quite different. While the early 2000s program focused on maintaining adequate benchmark auction sizes so that on-the-runs would stay liquid, the current liquidity support buybacks aim to support liquidity in off-the-runs by providing a regular, predictable opportunity to sell them back to Treasury. Our hope is that the existence of such an opportunity will encourage active liquidity provision in these securities.
While Treasury’s “liquidity support” buybacks are similar the buybacks of the early 2000s, our planned “cash management” buybacks likely have more in common with the buybacks of the 1920s, which applied excess revenues to the purchase of Treasury securities trading in the secondary market.[4] Dealers here today will be well-aware that the sizes of Treasury bill #auctions ebb and flow throughout the year due to the “lumpiness” of fiscal flows that are concentrated around quarterly #tax #payment dates. Cash management buybacks will provide,...
As announced at the May quarterly refunding, Treasury will initially seek offers to purchase up to $2 billion of nominals or $500 million of TIPS for “liquidity support” purposes, cycling through nine “#buyback buckets” - seven for nominals and two for TIPS. These buyback operations will start on May 29th and are planned to occur with a cadence of one operation per week through July 24th and will generally take place on Wednesdays between 1:40 and 2:00 p.m. These operations will initially be limited to 20 CUSIPs due to settlement process limitations. However, we expect that these limitations will be short-lived and in the coming months plan to remove all restrictions on CUSIP count and increase our liquidity support purchase maximums to the $30 billion per quarter level that we previously communicated. We aim to regularly update the market on our progress and will provide tentative operation calendars at each quarterly refunding.
Treasury expects #liquidity improvements resulting from buybacks to flow through three channels. First, dealers should feel more confident making markets in off-the-run #securities, as they will have Treasury as a regular and predictable buyer. Second, Treasury buybacks are expected to be “liquidity events” around which additional #trading activity is likely to take place. And third, dealers may use buyback operations to free up balance sheet allocated to less-liquid positions at a fair price.
Treasury has no intention of buying back securities that are already in high demand,