Treasury Quickly Financed Historic Government Response to the Pandemic and Is Assessing Risks to Market Functioning

“In response to COVID-19, in March 2020 many investors rapidly sold their
Treasury securities for cash. This led to a severe liquidity disruption when prices
fell and transaction costs rose for Treasury notes and bonds in the secondary
market. The Federal Reserve acted quickly to support market functioning,
including purchasing trillions of dollars of Treasury securities. This market disruption highlighted risks to the Treasury market. For example,
growth in federal debt and regulatory changes may reduce broker-dealers’
willingness and ability to intermediate trades (facilitate purchases and sales) of
Treasury securities for investors. In April 2021 Treasury initiated an interagency
effort to examine options that could help mitigate future disruptions in the market. Following the market disruption, Treasury quickly raised trillions of dollars to fund
the federal response to COVID-19. It dramatically increased its issuance of
bills—including adding regular, weekly auctions of cash management bills, which
have historically been issued irregularly to cover near-term financing gaps. The
bills were met with strong investor demand. For example, GAO found almost no
difference between cash management bill and other bill yields during this time.”

GAO-21-606, FEDERAL DEBT MANAGEMENT: Treasury Quickly Financed Historic Government Response to the Pandemic and is Assessing Risks to Market Functioning

Published by markskidmore

Mark Skidmore is Professor of Economics at Michigan State University where he holds the Morris Chair in State and Local Government Finance and Policy. His research focuses on topics in public finance, regional economics, and the economics of natural disasters. Mark created the Lighthouse Economics website and blog to share economic research and information relevant for navigating tumultuous times.

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