Hal S. Scott, John Gulliver & Hillel Nadler, Nothing but the Facts: The U.S. Treasury Market During the COVID-19 Crisis (2021).
Abstract: In this report, the Committee on Capital Markets Regulation (the “Committee”) describes the turmoil in the U.S. Treasury market during March 2020, with a focus on the unexpected rise in Treasury yields, the illiquidity in the Treasury market and the subsequent intervention by the Federal Reserve to stabilize the market. We then describe the market structure for trading U.S. Treasuries as well as trade reporting requirements and public information regarding the owners of Treasuries. We find that policymakers and the public lack the transaction data to comprehensively determine the source of selling in March 2020 that drove the volatility in the U.S. Treasury market. Policymakers have sought to identify the source of the selling pressure in the Treasury market in March 2020 because holders of U.S. Treasuries, including large financial institutions and foreign investors, rely on the assumption that Treasuries are cash-like instruments.1 For U.S. Treasuries to continue to function as a global safe haven asset, Treasuries must retain their value and trade efficiently during market crises. Identifying the source of the selling pressure in March 2020 would enable policymakers to determine whether changes to regulation or market structure are necessary to allow the Treasury market to better accommodate such selling in the future. In-deed, understanding the potential sources of fragility in the Treasury market remains important, as periodic bouts of volatility persist—most recently in February 2021.2 In Part I of our report, we summarize the volatility in the U.S. Treasury market in March 2020 and the Federal Reserve’s role in stabilizing the market. In Part II, we provide a comprehensive overview of the market structure for trading U.S. Treasuries (so-called “cash Treasury” markets), including the respective role of broker-dealers, proprietary trading firms, institutional inves-tors and trading venues. Part II then describes the trade information for U.S. Treasuries available to regulators from the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine (“FINRA’s TRACE database”). Finally, in Part III we evaluate public disclosures of ownership information and trade data for U.S. Treasuries, including data provided by the Federal Reserve and U.S. Treasury Department regarding institutional investors, foreign investors and foreign official investors (such as central banks and sovereign wealth funds). We also review public disclosures regarding the U.S. Treasury holdings of hedge funds and mutual funds. We conclude that policymakers and the public lack the trade and ownership information necessary to comprehensively determine the source of selling in the Treasury market in March 2020. We therefore recommend that policymakers exercise caution before reaching conclusions or enacting regulations related to the March 2020 spike in Treasury yields. An appropriate first step for policymakers would be to consider whether expanded reporting obligations for participants in the U.S. Treasury market are warranted. In addition, policymakers should continue to study activity in the U.S. Treasury market to determine whether other reforms could enhance its efficiency, resiliency and transparency.