US Treasury asks major banks if it should buy back U.S. government bonds

(Reuters) -The U.S. Treasury Department is asking primary dealers of U.S. Treasuries whether the government should buy back some U.S. government bonds to improve liquidity in the $24 trillion market.

Investors are worried about rising volatility in bonds as the Federal Reserve rapidly raises interest rates to bring down inflation.

The Treasury market has swelled from $5 trillion in 2007 and $17 trillion in early 2020, while banks are facing more regulatory constraints that they say make it more difficult to intermediate trades.

The Treasury is asking dealers about the specifics of how buybacks could work “in order to better assess the merits and limitations of implementing a buyback program.”

These include how much it would need to buy in so-called off-the-run Treasuries, which are older and less liquid issues, in order to “meaningfully” improve liquidity in these securities.

The Treasury is also querying whether reduced volatility in the issuance of Treasury bills as a result of buybacks made for cash and maturity management purposes could be a “meaningful benefit for Treasury or investors.”

It is further asking about the costs and benefits of funding repurchases of older debt with increased issuance of so-called on-the-run securities, which are the most liquid and current issue.

The Treasury Borrowing Advisory Committee (TBAC), a group of banks and investors that advise the government on its funding, has said that Treasury buybacks could enhance market liquidity and dampen swings in Treasury bill issuance and cash balances.

It added, however, that the need to finance buybacks with increased issuance of new securities could increase yields and be at odds with the Treasury’s strategy of predictable debt management if the repurchases were too variable in size or timing.

The Treasury is posing the questions as part of its regular survey of dealers before each of its quarterly refunding announcements.

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