Trading Volume
The record debt sales, combined with the Federal Reserve’s quantitative easing policy of buying Treasury bonds, have boosted interest in the market. There are five more primary dealers today than at the end of June 2009, as U.S. units of Royal Bank of Canada, Nomura Holdings Inc., Societe Generale SA, Bank of Montreal and Bank of Nova Scotia won the New York Fed’s approval. The 21 dealers today compare with 18 when the program started and with a peak of 46 reached in 1988.
The increase in outstanding debt hasn’t translated to the jump in trading some dealers anticipated. An average of $548 billion of Treasuries has traded weekly this year, according to primary-dealer transaction data compiled by the New York Fed. That compares with an average $546 billion weekly in 2006 and 2007, before government borrowing ballooned.
Electronic Platforms
There are multiple explanations for why direct bidding has soared. Pimco’s Rodosky attributes it to investors’ greater comfort with electronic trading. Firms including BlackRock and primary dealers Citigroup Inc. and Goldman Sachs have started electronic bond-trading platforms in the last year. Bloomberg LP, the owner of Bloomberg News, also operates a platform.
Darrell Duffie, a finance professor at Stanford University near Palo Alto, California, said investors have been driven to place direct bids by increased competition for the notes and bonds. The Fed’s purchases, new collateral rules that require more trades to be backed up with Treasuries and a desire for safety from risks in Europe have all whetted appetite in the market, Duffie said.
Ninealpha’s Evans said the rise in direct bidding may have more to do with the size of some Treasury investors, including foreign central banks, money managers and hedge funds. Any change in strategy can have a big effect on the market, he said.
China, OPEC
The Fed is the biggest holder of U.S. Treasury debt, with more than $1.79 trillion, according to central bank data through March 27. China holds $1.26 trillion, Japan $1.12 trillion and the Organization of Petroleum Exporting Countries $262 billion, Treasury data through January show. Among U.S. investors, Vanguard Group Inc. has $155.6 billion, Pimco $148.6 billion and BlackRock $62.9 billion, data compiled by Bloomberg show.
For large investors, “to make a meaningful change in their investment portfolio or to reinvest requires the movement of large positions,” Evans said. “There’s some concern about tipping their hand to the broader marketplace.”