- How to keep the next 'dash for cash' from crashing bond market

A new analysis suggests that in order to prevent the U.S. Treasury market from seizing up during future crises, the Federal Reserve should be prepared to engage in unlimited bond purchases. This recommendation comes in response to the market’s failure to function properly at the beginning of the COVID-19 pandemic, when dealers lacked the capacity to handle the influx of Treasury sales. The Federal Reserve intervened by purchasing billions of dollars worth of bonds, which helped alleviate the strain on dealer balance sheets. The author of the analysis, Professor Darrell Duffie from Stanford University, emphasized the need for transparent official-sector purchase programs to ensure market resilience. Additionally, Duffie proposed the broader use of central clearing and changes to the assessment of bank capital levels as measures to prevent future episodes of Treasury market illiquidity. Temporary changes were made to the Supplementary Leverage Ratio exemption after the March 2020 crisis, but these changes were allowed to expire a year later. Duffie also suggested technical changes to market function to encourage direct buying and selling without dealer intermediation. These recommendations were presented at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming.