Treasury-market liquidity may not improve under 2024 buyback plan, Jefferies says

The U.S. Treasury's plan for a 2024 regular buyback program to help support liquidity in the government-debt market is drawing doubts from at least one important player: investment bank Jefferies Group.Since buybacks were first discussed in late 2022, Jefferies (JEF) has "expressed extreme skepticism that such a program would have benefits that outweigh the costs and risks," said U.S. economist Thomas Simons. Jefferies is one of two dozen primary dealers that act as trading counterparties of the Federal Reserve's New York branch, and help to implement monetary policy.Treasury's buyback plan was included in the department's quarterly refunding statement on Wednesday. In that announcement, Josh Frost, assistant secretary for financial markets, said that the program would be conducted in a "regular and predictable manner" and "initially sized conservatively," though Treasury is still working out the specific details.Read: U.S. Treasury to auction $96 billion next week in refundingThe broader Treasury market has been plagued by liquidity problems throughout the Federal Reserve's yearlong campaign to quell inflation by raising its policy interest rate. That's because higher actual or expected interest rates put pressure on traders to sell short-dated maturities, which then produces higher yields. Illiquidity means that government debt can't be easily and quickly bought and sold without significantly impacting the underlying price of the maturities.See also:Fed warns of 'low' market liquidity in $24 trillion Treasury market, in 2022 financial stability reportIn recent weeks, short-dated Treasury bills have experienced wild volatility as a result of another factor: ongoing uncertainty over the U.S. debt ceiling. Traders have avoided bills that could mature around the same time or after the period in which the government might run out of money, translating into yet another reason for traders to sell. The rate on the 3-month T-bill , for instance, soared to its highest level in more than 20 years on Tuesday. Wednesday's Treasury announcement mentions the likelihood of greater-than-normal variability in benchmark bill issuance until Congress raises or suspends the $31.4 trillion U.S. debt ceiling. The department reiterated comments made by Treasury Secretary Janet Yellen earlier this week, and estimates it will be unable to satisfy all of the U.S. government's obligations by possibly as soon as June 1 unless Congress acts."Buybacks are no simple fix to liquidity problems in certain sectors of the Treasury market. They would introduce a number of risks," said Simons of Jefferies. Those risks include the "difficulty in calibrating the sizing of the buybacks and the new issuance to fund them such that liquidity does not improve on net," and the creation of opportunities for investors "to take advantage" of a situation in which Treasury is seen as "a free option for liquidity.""We remain of the opinion that the liquidity management role is much better suited to the Federal Reserve," Simons wrote. He acknowledged there may be "some merit" to using buybacks to manage bill supply, and said "we should reserve judgment on buybacks until there are more details available." However, "it is troubling that Treasury is seemingly committed to introducing this program without having it fully fleshed out," the economist said.See also: 'This is not QE or QT. This is none of those.' Why the U.S. Treasury is exploring debt buybacks On Wednesday, Fed policy makers hiked rates by another 25 basis points to above 5% and signaled the potential for a pause. Two- , 10- , and 30-year Treasury yields fell to their lowest levels in a week, while all three major U.S. stock indexes finished lower.

-Vivien Lou Chen

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05-03-23 1605ET

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