NYU Stern Prof. Bruce Tuckman on the Repo Market Decline

NYU Stern Professor Bruce Tuckman was quoted in a recent Bloomberg article,
“Repo Market Decline Raises Alarm as Regulation Strains Debt.” Excerpt below: 

“Regulations aimed at reducing the risk of another financial crisis are starting to upend a key part of the bond market that expedites trading in everything from Treasuries to junk bonds.

The U.S. repurchase, or repo, market where banks and investors borrow and lend Treasuries and other fixed-income securities shrunk to $4.6 trillion daily outstanding last month, down 35 percent from a peak of $7.02 trillion in the first quarter of 2008, based on Federal Reserve data compiled from its 21 primary dealers.

From fewer repos to lower inventories of bonds, financial institutions are responding to more stringent capital standards imposed by regulators around the world. Already, the group of dealers and investors that advise the U.S. Treasury say that they see declines in liquidity in times of market stress, including wider gaps between bid and offer prices and the speed of completing trades. The potential consequences are higher borrowing costs for governments, companies and consumers


Price Changes
Even though Fed data show primary dealers trade almost $600 billion of Treasuries each day on average, making the market the deepest, most liquid in the world, prices suggest constraints on bank balance sheets are having an impact on trading.

The difference between the prices at which dealers buy and sell Treasury futures contracts is about 2/32, or 63 cents per $1,000 face amount, or double what it was in the five years before the bankruptcy of Lehman Brothers, according to data compiled by Bloomberg.

“Recent regulatory changes will cause dealers to reduce risk and to make markets less aggressively,” Bruce Tuckman, senior fellow of financial markets research at the non-profit Center for Financial Stability and a finance professor at New York University’s Stern School of Business, said in an Aug. 14 telephone interview. “End users will lose some liquidity as dealers adjust to higher risk capital mandates, lower leverage limits, and increased margin requirements.”

Read the entire Bloomberg Article.

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