The House Financial Services Committee holds a hearing on U.S. treasury debt — 4/8/2025

Key Concepts

• US Treasury Market: The deepest, strongest, and most liquid bond market globally, serving as a safe investment, risk-free benchmark, and tool for monetary policy.
• National Debt: The total amount of money owed by the US federal government, which has rapidly increased to over $35 trillion.
• Market Liquidity: The ability to buy or sell assets quickly without causing a significant change in price.
• Federal Reserve (The Fed): The central bank of the United States, responsible for monetary policy and holding a significant portion of US Treasury debt.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Supplemental Leverage Ratio (SLR): A capital requirement for banks that is not risk-sensitive and can constrain their ability to intermediate in the Treasury market.
• Central Clearing: A process where a central counterparty (CCP) interposes itself between buyers and sellers, reducing risk through standardized risk management and netting.
• Basel 3 Endgame: A set of international regulatory reforms designed to strengthen bank capital requirements and risk management.
• Quantitative Tightening (QT): A monetary policy tool used by central banks to reduce the size of their balance sheets by selling assets or allowing them to mature without reinvestment.
• Tariffs: Taxes imposed on imported goods, which can lead to higher prices, slower economic growth, and trade disputes.

US Treasury Debt in the Monetary System

I. Opening Statements

• Chairman Lucas: Highlights the importance of the US Treasury market as the foundation of the global financial system.
  • The Treasury market equips investors with a safe investment, serves as a risk-free benchmark, finances government operations, and is an essential tool for the Fed's monetary policy.
  • The national debt has skyrocketed to over $35 trillion due to supply chain constraints, global conflicts, and irresponsible fiscal policy.
  • The Treasury market has doubled in the last decade alone.
  • The Fed currently holds more than $4 trillion of treasuries on its balance sheet.
  • Prioritizing greater liquidity of the treasury market is paramount to US leadership abroad and the dollar status as the world's reserve currency.
• Ranking Member Vargas: Criticizes President Trump's economic policies, including tariffs, for creating uncertainty and harming consumer and business confidence.
  • The Conference Board's consumer confidence index has fallen to its lowest level since January of 2021.
  • A Harvard Business School study found that more than half of small and mid-size business owners expect tariffs to increase their operating costs.
  • Chairman Pal cautioned that these tariffs are significantly larger than expected and the same is likely true for the effects which quote will include higher inflation and slower growth.
  • A recent analysis from a research center at Yale estimates that these tariffs will cost the average US household an estimated $3800.
  • The US Treasury market is the very bedrock of the global financial system.
  • Supports improving efficiency, resilience, and functionality, including looking at the supplemental leverage ratio (SLR) and central clearing.
• Chairman Hill: Emphasizes the Treasury market's role in the global economy and the dollar-based reserve currency system.
  • The Treasury market affords investors the opportunity to purchase nearly risk field free assets that facilitate our nation using those favorably priced proceeds to invest in our national priorities.
  • The Federal Reserve owns over $4 trillion dollars of treasuries through its many rounds of quantitative easing.
  • Increasing federal budget deficits and ownorous regulations call into question the Treasury market's resilience.
• Ranking Member Waters: Highlights the negative impact of Trump's policies on the economy.
  • After Trump announced his tariff plan last week a record 6.6 trillion in wealth was erased in two days in the stock market.
  • Fed Chair Powell has warned that "We face a highly uncertain outlook with elevated risk of both higher unemployment and higher inflation."

II. Witness Testimony

• Mr. Tom Wiff (UBS): Focuses on the importance of the US Treasury market and the need for reforms to enhance liquidity and market resiliency.
  • The US Treasury market is the largest and most liquid bond market on the planet.
  • Treasury yields have an impact on the rates that consumers businesses and governments across the globe pay to borrow money.
  • The US Treasury repo market is a key transmission mechanism for US monetary policy.
  • The Treasury market has grown significantly in recent years, with $28 trillion in Treasury securities outstanding today, more than double the total from 2016.
  • The capacity for dealers to intermediate has become increasingly constrained by the application of additional capital and credential requirements.
  • The supplementary leverage ratio (SLR) and other leverage requirements create binding constraints for some large dealer banks, reducing their capacity to intermediate.
  • Supports the SEC's rule on central clearing of US Treasury securities and repo transactions.
  • SIFMA is working with its members to develop standardized documentation policies and procedures to facilitate the transition to mandated central clearing.
  • The SEC could make certain technical fixes to the rule.
• Mr. Scott O'Malia (ISDA): Advocates for changes to the SLR, Basel 3 endgame, and margining requirements to support Treasury market liquidity and clearing.
  • Supports mandatory requirements to centrally clear Treasury securities.
  • The SLR should be modified to ensure banks have the balance sheet capacity to provide intermediation and client clearing services.
  • The Basel 3 endgame and searchcharge for globally systemic banks (GIBs) must be revised to remove any unnecessary and disproportionate tax on clearing.
  • Margining and capital treatment of client clearing exposures must be revised to reflect the actual risk of clients overall portfolio.
  • Policy makers, market infrastructure providers, and market participants must continue to work together to address operational, legal, and regulatory issues related to the clearing mandate.
  • The Basel proposals and the GI search charge would increase capital on USGB client client clearing business by more than 80%.
  • Margin offsets across treasury securities and futures transactions need to be extended to the client positions.
• Professor Kristen Forbes (MIT Sloan School of Management): Highlights the importance of the Treasury market and monetary policy, as well as growing risks and challenges.
  • A less efficient treasury market increases not only borrowing costs for the government but also for mortgages car loans and bank loans for your constituents.
  • The US budget debt deficit is forecast by the CBO to be almost $2 trillion this year under current law.
  • The capacity of broker dealers to intermediate has simply just not kept up with the increased size of the treasury market.
  • Foreigners are purchasing less balanced by US institutions purchasing more.
  • These US institutions are hedge funds and asset managers that are not simply buying and holding treasuries but using a combination of repurchase agreements futures derivatives and hedging strategies combined with high leverage.
  • Shifts in geopolitical alliances and increased restrictions on trade and financial flows could reduce the demand for US dollars and treasuries.
  • Disruptions to trade and supply chains will increase both inflation and unemployment.
  • Central bank independence is under pressure in many countries around the world.
• Honorable Nelly Liang (Brookings Institute): Focuses on Treasury market resilience and its importance for monetary policy and financial stability.
  • The Treasury market is key to financing the government at lowest cost to the taxpayer, an important channel for Federal Reserve monetary policy, provides the benchmark risk-free yield curve globally, and is a key source of safe assets.
  • Electronic trading has increased and principal trading firms represent most of the trading in electronic interdeler markets.
  • Traditional securities dealers have pulled back from marketmaking after capital standards and riskmanagement practices were strengthened after the global financial crisis.
  • Treasury debt continues to grow and the investor base is more price sensitive as private funds with leverage and redemption pressures have increased their holdings.
  • The Treasury market dysfunction at the onset of the COVID pandemic in March 2020 illustrates these risks.
  • The Fed purchases to restore market functioning were aligned with its monetary policy objectives at the time to stimulate the economy and raise inflation to its 2% target.
  • Key reforms to strengthen resilience include more data on transactions and hedge funds, new data on the repo market, and a Treasury buyback program.
  • The SEC's rule to mandate more central clearing of treasuries and repo is of special importance.
  • Changes should be considered to the supplementary leverage ratio (SLR).
  • Open-end bond funds should be required to reduce significant liquidity mismatches.
  • Supervisors should prevent excessive leverage of hedge funds in trades such as the cast futures basis trade.

III. Member Questions

• Members of the task force question the witnesses on various topics, including the implementation of the clearing rule, the SLR, the impact of tariffs, and the role of foreign investors.
• The potential impact of tariffs on inflation and economic growth is a major concern.
• The independence of the Federal Reserve is also a key issue.
• The increasing national debt and its potential consequences are discussed.
• The role of foreign investors in the Treasury market and the potential impact of a decoupling from China are explored.

IV. Synthesis/Conclusion

The hearing highlights the critical importance of the US Treasury market to the global financial system and the US economy. Several challenges and risks are identified, including the growing national debt, constrained market liquidity, the potential impact of tariffs, and the need for regulatory reforms. The witnesses emphasize the importance of enhancing Treasury market resilience, promoting central clearing, and addressing capital requirements for banks. The need for collaboration between regulators and market participants is also stressed. The hearing underscores the complex and interconnected nature of the Treasury market and the importance of addressing these challenges to ensure the stability and efficiency of the financial system.