Here's an thread explaining what the Fed did, and why it did it. The Fed said it was throwing trillions into the repo funding market and tweaking its asset purchases to deal with 'highly unusual disruptions' in Treasurys. This goes into why (1/n)
The Treasuries market is an iceberg. On-the-run Treasuries are the visible part of the market, they're the ones most recently issued by the government. They're traded by algorithms and its incredibly easy to dip and out of them. (1/n)
But it's arguably the "off-the-runs," that is more crucial here because its the majority of the U.S Treasuries market. Every time the govt issues debt it relegates the previous on-the-run benchmark to off-the-run status. (2/n)
Now off-the-runs are held by "real money". Investors, pension funds, anyone who uses it to earn an income. At times like this, they might want to pocket the enormous gains in the bond market or sell them to free up cash if they're handling redemptions. (3/n)
But dealers, the middlemen of the market, don't want to trade off-the-runs in volatile markets because you can't swiftly move them in and out of your inventory. So the dealer raises the trading cost, or the bid-offer spread, as compensation for trading an illiquid bond.(4/n)
On top of that, postcrisis regulations and the consolidation of Wall Street after 2008 means only a few dealers can "take risk" and lend out what precious space they have on their balance sheet to trade off-the-run bonds. (5/n)
As a result, trading vanishes in off-the-run bonds and market liquidity in the most liquid market in the world collapses. Some traders will tell you there were times could not sell an off-the-run Treasury bond this week even if you begged someone. (6/n)
The Fed's measures are a well-constructed one-two punch. First, you lend out money for a month to few months, so primary dealers can finance and scale up its buying of off-the-run Treasurys. Second, the central bank only targets off-the-run bonds through its asset purchases.(7/n)
With this setup, hopefully, the liquidity issue in off-the-run Treasurys are ironed out. (The end)
