The market for U.S. debt is weirder than you think

Do you remember what sent the stock market into turmoil last week? A spike in wage data convinced investors that higher inflation was just around the corner, leading to a sell-off in a bunch of U.S. Treasuries. That convinced the stock market that higher interest rates were just around the corner, leading to sell-offs there too. Temporary panic ensued. In other words, behind the stock market rout was a minor change in the U.S. debt market.

So now is a good time to examine that market in greater detail. Because it’s weirder than you think.

Every so often, the Treasury Department decides it needs to issue new debt. Maybe Congress just passed a new spending or tax cut bill without any offsets, or maybe old debt just needs to be rolled over into new debt. The U.S. government offers Treasuries for purchase, which which come as bills, notes, or bonds depending on their design. People buy Treasuries from the government, and eventually the government pays them back with interest.

When that new debt is needed, the Treasury Department announces an auction. Set up to bid are hundreds of financial institutions, along with a much smaller number of “primary dealers,” like JP Morgan, Goldman Sachs, and Merrill Lynch. Primary dealers have to meet certain qualifications, like maintaining a minimum share of the market in securities, and making reasonable bids in all the auctions. In exchange, they get to buy the bulk of Treasuries, which makes them popular choices to do business with: Everyone else in the economy needs Treasuries for all sorts of things, from savings to portfolios, trades, collateral, and more.

That brings us to the Federal Reserve — and the first signs of weirdness.

By law, the Fed can’t buy Treasuries …read more

Source:: The Week – Business


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