This was part of Systemic Risk and Stress Testing
Curing Treasury Market Dysfunction under Stress
Darrell Duffie, Stanford University
Monday, April 4, 2022
Abstract: I will review the lack of functionality of the market for U.S. Treasuries under stress, drawing from the experience of March 2020, when the Covid Crisis triggered investor flows that overwhelmed intermediaries. Although the Fed, through an unprecedented rate of treasury purchases and other actions, was eventually able to restore market liquidity, the design of the US Treasury market was revealed to lack resilience under stress, and to be an amplifier of financial instability. Among other approaches to improving financial stability with changes in market structure, I highlight the benefits of broad central clearing, drawing from recent empirical work by Michael Fleming and Frank Keane of the Federal Reserve Bank of New York. References: "U.S. Treasury Markets: Steps Toward Increased Resilience," G30 Working Group on Treasury Market Liquidity, Group of 30, Washington, D.C., July, 2021. "Still the World’s Safe Haven? -- Redesigning the U.S. Treasury Market After the COVID- 19 Crisis," Hutchins Center Working Paper Number 62, Brookings Institution, May, 2020 Fleming, Michael, and Frank Keane, "The Netting Efficiencies of Marketwide Central Clearing," Federal Reserve Bank of New York. Staff Report Number 964, April 2021.