MNI: Fed’s Logan- Reforms Needed To Strengthen Bond Market

Bond market regulators must persist with reforms that will ensure liquidity under stress and minimize the need for costly interventions from the Federal Reserve, Dallas Fed President Lorie Logan said Friday.

Key reforms include moves to increase the range of centrally cleared trades as well as establishing guidelines for when authorities should intervene – and for how such actions must be kept separate from monetary policy.

“I am optimistic that with continued reforms, we can make core markets resilient enough that interventions to support market functioning will be extraordinarily rare,” Logan said in prepared remarks at a Chicago Booth conference on market function. (See MNI: US Treasury Clearing To Limit Contagion, Create New Risks)

When central banks do intervene it's important to make clear that it's doing so to help markets continue working rather than to stimulate economic activity, she said.

ENGLISH APPROACH

"It would be desirable to have options for clearly distinguishing these operations from monetary accommodation. One approach, following the recent example of the Bank of England, could be for a central bank to separately track assets purchased to support market functioning and sell these holdings in a timely way once market functioning has normalized," Logan said.

Central banks can also widen the reach of their repo operations by reducing the costs to counterparties of participating in those markets, Logan said.

“The FOMC could further consider the potential benefits of centrally clearing Standing Repo Facility operations, as several committee participants suggested in a 2021 meeting,” she said. "Central clearing would reduce our counterparties’ balance sheet costs.”

Logan, previously head of the New York Fed’s trading desk, said the Treasury market’s fragilities are linked to rapid growth that made it hard for primary dealers to absorb the sheer volume of bonds.

“A growing share of the debt is held by investors such as hedge funds and mutual funds that trade more frequently or rely on the ability to quickly monetize assets when needed,” she said. “The rise of electronic trading has also shifted intermediation toward principal trading firms, which typically hold less capital."