Fed study finds Treasury dealers can finance bonds after inventory clearance

Federal Reserve research published on Oct. 30 indicates that Treasury dealers can continue financing customer bonds even after their auction inventory is largely cleared. This ongoing lending utilizes balance-sheet capacity, suggesting that declining inventories may not fully reflect dealers' financing capabilities. The study estimates that each dollar of Treasury coupon issuance increases dealer balance sheets by approximately 0.21 dollars, with about two-thirds of this attributed to client financing. The analysis covers eight large bank-affiliated dealers from January 2016 to June 2025. The research highlights that dealers can sell Treasuries while still providing repo financing, which are short-term loans secured by the bonds. The impact of coupon issuance on dealers' long positions diminishes within roughly three days, while reverse repo financing remains measurable for about a week. Additionally, the study links increased issuance to greater use of internal risk limits at Treasury trading desks, potentially reducing intermediation capacity. Observations from the New York Fed show the Secured Overnight Financing Rate (SOFR) ranged from 3.92% to 3.95% from Oct. 23 to Oct. 29, with the latest reading at 3.94%. The Federal Home Loan Bank of New York reported a 3.90% interest rate on reserve balances, attributing SOFR trading above this rate to Treasury supply and month-end factors. The study also suggests that if constrained intermediaries fund Bitcoin traders, reductions in their lending could transmit Treasury pressures into the crypto market.

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