Brainard says balance sheet reduction going smoothly

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The Treasury market has functioned normally despite the Federal Reserve’s balance-sheet reduction, according to Federal Reserve Board Gov. Lael Brainard.

“[T]he initiation of policy normalization and the ongoing reduction of the Federal Reserve’s balance sheet do not appear to have sparked a deterioration in Treasury market liquidity,” Brainard said at a Federal Reserve Bank of New York conference Monday, according to prepared text released by the Fed. “Standard metrics such as bid-ask spreads have not materially changed for benchmark securities since 2014. Market functioning has also been orderly during a number of recent events that were characterized by high trading volume and elevated price volatility, such as in early February of this year.”

Certain parts of the market — she mentioned off-the-run trading, deep off-the-run notes and bonds and Treasury Inflation-Protected Securities (TIPS) — have been trading more frequently than expected.

And while there was concern “that proprietary trading firms had already eclipsed bank dealers in benchmark Treasury trading or would come to threaten the dealer business model more broadly, neither has occurred,” Brainard noted.

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