When the world’s biggest debt market starts having major liquidity issues, investor panic rises to a whole new level.
On March 12 and 13, after about a week of extraordinary dysfunction in the US Treasury market, the Federal Reserve issued a major crisis response, expanding Treasury purchases and repurchase operations to boost liquidity and shore up so-called risk-free assets.
Will it be enough to fix the Treasury market? Here’s our take.
It’s a big deal
Effectively, the Fed just kicked off quantitative easing lite. The March 12 announcement laid out a month-long, $60 billion bond-buying schedule that included Treasurys of all maturities. On March 13, the Fed accelerated that schedule and bought $37 billion of bonds across the curve. (The original purchase schedule called for $15 billion worth of relatively short-duration securities on March 13.)
This is a big deal. First, the announcement to buy across maturities was a surprise. Many Fed-watchers had only expected purchases to eventually expand out to the 2-year part of the curve. Second, by taking two aggressive actions before the March 17-18 Federal Open Market Committee meeting, the Fed is signaling that it will not let liquidity dry up and that it is committed to stabilizing markets. It’s also the second time this month that the central bank has taken emergency action outside the regular meeting calendar (the first being the March 3 intermeeting rate cut).