The U.S. Office of Financial Research today posted a research brief, "Treasury Market Stress: Lessons from 1958 and Today," and an accompanying blog. The brief finds that sources of two disruptions to the U.S. Treasury market more than 60 years apart stemmed from similar vulnerabilities, such as low margins, little market transparency, and reliance on market-based financing.
While the stress Treasury markets experienced in March 2020 took many by surprise, it was not unprecedented. The OFR examined a similar episode of Treasury market stress that took place in the summer of 1958. Although different events triggered these episodes, the brief shows that they have many similarities in terms of the vulnerabilities they exposed: a high level of outstanding debt, dealers overloaded with Treasury securities, large positions (sometimes with minimal haircuts) funded using leverage in the repo market, a prevalence of carry trades, and sudden increases in margins.
The discussion in the brief covers the expansion of market-based financing in the Treasury market over the 1950s, including how it was driven by demands for short-term and highly liquid investment mediums from outside the financial sector. Finally, it reviews the challenges for reform policymakers faced in the wake of the crisis.
The blog can be found here.
The brief can be found here.
The OFR home page is: https://www.financialresearch.gov/.
