Think Treasuries are risk-free? Not so fast.

6-Jun-2019 1:05 PM EDT, by Vanderbilt University

Newswise — Patchy regulation and rules that haven’t kept up with the evolution of trading technology have left the Treasury market far more vulnerable to shocks than we realize, says Vanderbilt law professor Yesha Yadav. Her recent research paper, The Myth of Risk-Free Markets, is the first legal analysis of the issue.

Treasury bonds are foundational to the global economy, because the United States’ credit is unimpeachable, Yadav says. “The United States will always pay its debts, and Treasury bonds can also be very easily traded.” This makes Treasuries very attractive to a wide variety of investors, ranging from individuals looking for a safe place to put their savings, all the way up to entire nations looking to shore up their currency.

While the safety promised by Treasuries has not changed, Yadav says, the structure of Treasury market has, transforming how these bonds are traded. Oversight has not kept up with these changes, she says, and the rules governing the market are badly out of step with innovation. This leaves the market vulnerable to a shock (say, if China dumps its Treasuries in retaliation for an unsatisfactory outcome in the trade war).

Disruption and uncertainty in the Treasury market could be catastrophic, Yadav warns. “It’s a potential doomsday situation. We really have no idea how badly things could turn out for us,” she says.

But there are solutions.

A (quick) buck with nowhere to stop

Treasuries enjoy much lighter regulation compared to other securities, like stocks, Yadav says. Treasury traders are subject to far fewer rules than stock traders, and oversight falls to at least five different federal agencies, none of which has lead status or is in charge of the full picture.

This was perhaps less of a concern when the Treasury market was dominated by just a handful of major Wall Street banks, known as primary dealers, sedately trading via telephone, she says, because they had an economic stake in policing themselves well. “The Treasury market was their playground,” Yadav says. “They had strong incentives to keep it healthy.”

Today, however, she says these primary dealers are facing serious competition from trading firms using high-frequency trading (HFT) algorithms to buy and sell Treasuries lightning-quick throughout the day. HFT introduces new fragilities because the algorithms must be programmed in advance in order to trade so quickly. But their predictions aren’t perfect. Algorithms can misfire, trade on fake news or struggle when market conditions are unexpected. While trading errors are a normal part of life, HFT causes such errors to occur far quicker and spread much more broadly today than in the era of telephone or fax. This can lead to alarming (and damaging) flash crashes that can quickly spiral out of control. Indeed, the Treasury market has already experienced at least two unexplained “flash” events in recent years.  

Adding additional risk to the equation, many of these newcomer HFT firms do not claim the status of primary dealers, and so are subject to fewer rules than the big dealer banks. Platforms that trade Treasuries only are also exempt from regulation. So, this market can lack even basic safeguards and standards that are taken for granted elsewhere.

Finally, in a competitive world, both primary dealers and HFT firms have diminishing skin in the game. They may be tempted to cut their losses and stop trading altogether during a crisis—a move that might be in a firm’s best interest but which would destabilize the market and create enormous disruption and uncertainty, not to mention reputational damage for Treasuries.

Redesigning the market

Strengthening both public and private oversight is essential to shoring up the stability of the Treasury market, Yadav says. While establishing a primary regulator seems like an obvious step, it’s not a simple one logistically or politically. She says a good first move could be the development of a detailed memorandum of understanding between all regulators to encourage greater collaboration between agencies, identify and fill gaps, eliminate redundancies and streamline data collection and reporting.

Additionally, she says, policymakers should think about bringing Treasury market oversight within the purview of the Financial Stability Oversight Council, a new body created by the Dodd-Frank Act to help regulators to coordinate with one another. “Sometimes you just need to get everyone at the table to make sure everyone’s on the same page,” she says.

Finally, she says, regulators could require dealers to remain on the market during periods of distress, in order to keep prices stable and ensure liquidity. By keeping them on the hook in times of trouble, dealers would have incentive to install solid guardrails of their own—such as ensuring their operating systems are of the highest standard, that their algorithms are robust and well-tested and that their traders are adequately trained on the platforms they use.

“This is an area that really hasn’t been studied very well,” Yadav says. “But we urgently need to think about how we can update regulations to address the gaps left by innovation and the arrival of new actors that have rapidly changed the face of this existentially important market.”


Filters close

Showing results

110 of 4573
Released: 15-Jan-2021 5:40 PM EST
Research Links Social Isolation to COVID-19 Protocol Resistance
Humboldt State University

As health officials continue to implore the public to wear masks and practice social distancing, recent research by Humboldt State University Psychology Professor Amber Gaffney provides key insights into connections between social isolation, conspiratorial thinking, and resistance to COVID-19 protocols.

Newswise: Rapid blood test identifies COVID-19 patients at high risk of severe disease
Released: 15-Jan-2021 5:35 PM EST
Rapid blood test identifies COVID-19 patients at high risk of severe disease
Washington University in St. Louis

Scientists at Washington University School of Medicine in St. Louis have shown that a relatively simple and rapid blood test can predict which patients with COVID-19 are at highest risk of severe complications or death. The blood test measures levels of mitochondrial DNA, which normally resides inside the energy factories of cells. Mitochondrial DNA spilling out of cells and into the bloodstream is a sign that a particular type of violent cell death is taking place in the body.

Released: 15-Jan-2021 2:55 PM EST
COVID-19 deaths really are different. But best practices for ICU care should still apply, studies suggest.
Michigan Medicine - University of Michigan

COVID-19 deaths are indeed different from other lung failure deaths, according to two recent studies, with 56% of COVID-19 patients dying primarily from the lung damage caused by the virus, compared with 22% of those whose lungs fail due to other causes. But, the researchers conclude, the kind of care needed to help sustain people through the worst cases of all forms of lung failure is highly similar, and just needs to be fine-tuned.

Released: 15-Jan-2021 2:50 PM EST
45% of adults over 65 lack online medical accounts that could help them sign up for COVID-19 vaccinations
Michigan Medicine - University of Michigan

As the vaccination of older adults against COVID-19 begins across the country, new poll data suggests that many of them don’t yet have access to the “patient portal” online systems that could make it much easier for them to schedule a vaccination appointment. In all, 45% of adults aged 65 to 80 had not set up an account with their health provider’s portal system.

Released: 15-Jan-2021 1:30 PM EST
New England Journal of Medicine publishes COVID-19 treatment trial results
University of Texas at San Antonio

A clinical trial involving COVID-19 patients hospitalized at UT Health San Antonio and University Health, among roughly 100 sites globally, found that a combination of the drugs baricitinib and remdesivir reduced time to recovery, according to results published Dec. 11 in the New England Journal of Medicine.

Released: 15-Jan-2021 12:40 PM EST
DNA test can quickly identify pneumonia in patients with severe COVID-19, aiding faster treatment
University of Cambridge

Researchers have developed a DNA test to quickly identify secondary infections in COVID-19 patients, who have double the risk of developing pneumonia while on ventilation than non-COVID-19 patients.

Released: 15-Jan-2021 12:30 PM EST
Fight CRC To Present Research Findings on The Impact of COVID-19 on the Colorectal Cancer Community at 2021 GI ASCO
Fight Colorectal Cancer

Fight Colorectal Cancer presents abstract at Gastrointestinal Cancer Symposium highlighting the need to address the barriers and opportunities for care within the colorectal cancer community during the COVID-19 pandemic

Released: 15-Jan-2021 12:25 PM EST
Technion to Award Honorary Doctorate to Pfizer CEO Dr. Albert Bourla
American Technion Society

Israel's Technion will award an honorary doctorate to Pfizer CEO and Chairman Dr. Albert Bourla, for leading the development of the novel vaccine against SARS-CoV-2, the virus that causes COVID-19. The honorary doctorate will be conferred at the Technion Board of Governors meeting in November 2021.

Released: 15-Jan-2021 11:30 AM EST
UW researchers develop tool to equitably distribute limited vaccines
University of Wisconsin-Madison

Researchers at the University of Wisconsin School of Medicine and Public Health and UW Health have developed a tool that incorporates a person’s age and socioeconomic status to prioritize vaccine distribution among people who otherwise share similar risks due to their jobs.

Showing results

110 of 4573