Dealers are holding highest level of Treasuries than ever before

Primary dealers hold the most Treasury securities on record, an indication that balance sheets are filling up after a global selloff in risk assets last week sent investors flying into haven assets. 

Aggregate holdings of Treasuries — which are comprised of coupon bonds, T-bills, floating rate notes and TIPS — by primary dealers rose to a record $361 billion in the week through Aug. 7, compared to $323 billion the week prior, Federal Reserve Bank of New York data show. 

A major selloff in risky assets last week sent investors rushing to US government debt and betting that the Federal Reserve would need to start aggressively cutting interest rates soon. 

Those moves led to some concern that a mix of long positions and demand for financing in the market for overnight general collateral repurchase agreements would increase, adding to dealers’ already crowded balance sheets. 

Treasury issuance has swelled in recent years to fund government deficits and replace securities rolling off the Fed’s balance sheet as part of quantitative tightening, or QT. As a result, primary dealers have had more supply to digest, andwith holdings at all-time highs, their normal function as an intermediary in the market has become constrained. 

That’s kept the rate for overnight repo, the benchmark for short-term financing needs, near levels typically seen at month- and quarter-end, when temporary strains in the funding market surface. 

Despite these higher rates, usage at the Fed’s overnight reverse repo facility has plateaued, adding to evidence of a backup in dealer activity.

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