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Free AccessMNI: Fed's Bowman Sees Risk of Impaired Treasury Market
Governor Michelle Bowman, left, speaks with panelists at a Fed Listens event in September 2022.
Federal Reserve Governor Michelle Bowman warned Wednesday Treasury market functioning is at risk of again becoming impaired, especially as Fed QT continues and Treasury auction volumes expand to meet issuance needs, and that can disrupt central bank plans.
"U.S. Treasury market stress events -- including the repo-market stress in September 2019 and the March 2020 dash for cash -- have raised concerns about the resiliency of U.S. Treasury markets," she said in remarks prepared for The Reinventing Bretton Woods Committee and Policy Center for the New South Marrakech Economic Festival in Marrakesh, Morocco. "It will be important to watch for signs of impaired Treasury market functioning."
Dealer balance sheet capacity may become strained, especially in times of volatile financial markets, limiting market funding, she added. Regulators should contemplate lowering the leverage ratio and global systemically important bank (G-SIB) surcharge for large U.S. banks as these are set much higher than the international standard, she said.
"These higher levels need to be reconsidered to ensure that dealers have adequate balance sheet capacity to intermediate Treasury markets in times of stress," she said. More data transparency on market pricing and flow would also encourage intermediary entry and competition. (See: MNI INTERVIEW: Reserve Scarcity Yet To Materialize-Fed Econ)
"Indicators of U.S. Treasury market liquidity have remained stable, and Treasury markets have continued to function, but risks remain."
CRE, OTHER RISKS
Bowman laid out a number of other financial system vulnerabilities and risks that she sees as most salient. Among those is the potential decline in commercial real estate property values and a resulting degradation of CRE loan quality in certain markets.
Some banks with large undiversified and geographically concentrated CRE portfolios may be at greater risk, as well as certain commercial mortgage-backed securities held by large insurers and pension plans that include nonperforming CRE loans, she said.
"Were these institutions to suffer significant losses on their CMBS holdings, there could be broader effects on the securitization pipeline for CMBS and on the CRE market," she said.
U.S. banks are experiencing higher funding costs and some deposit outflows as interest rates rise, but the vast majority are adequately managing their interest rate and credit risk and maintaining prudent capital and liquidity positions, she said. It's also important to monitor the interest rate and funding vulnerabilities of nonbank financial institutions like hedge funds, insurance companies, money market funds and corporate bond mutual funds that are highly leveraged and vulnerable to run risks, she said.To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.