NY Fed, Report: Market-Function Asset Purchases

“Official-sector interventions to restore the functionality of government bond markets will occasionally be necessary. At the 2021 U.S. Treasury Market Conference, John C. Williams, President and CEO of the Federal Bank of New York, observed that “…two lessons are clear. First, the unforeseeable and unpredictable will happen, and can result in significant stresses in the Treasury and related markets that may spread to broader financial conditions. Second, when disruptions have been sufficiently severe and persistent, the market has not been able to quickly self-correct without official-sector intervention.”58 Central bank “lender of last resort” financing is a first choice for restoring market functionality, but the need for purchases of government securities cannot be ruled out.”

“Common knowledge of the existence of standby purchase programs that address future episodes of market dysfunctionality is conceptually similar to having the fiscal authority add “liquidity insurance” to its offering circular. We therefore believe that official-sector market-function purchase programs should be made transparent by having an explicit intent; clear criteria for commencing, ending, and unwinding purchases; and clear disclosure of the corresponding purchases and their purpose. This clarifies the value of the liquidity backstop that accrues to holders of government securities so that this support can be better “priced into” bids for the securities when they are issued. This transparency and price discovery also improves the allocation of government securities to those investors with a greater usefulness for liquid safe-haven securities.”