The Real Bottleneck in the Treasury Market: It's Not Size, It's Not Enough Intermediaries
Primary dealers' balance sheets have long failed to keep pace with the growth of outstanding Treasuries. Market makers have given way to high-frequency traders, but the latter collectively retreated in March 2020 — that is the core of the Treasury liquidity problem.
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The Treasury market is so large it must attract new buyers
Golay gives the scale: CBO counts $30 trillion in outstanding Treasuries by end-2025, projected to grow by another $26–27 trillion over the next decade. The market splits into two parts — the cash market (direct buying and selling of Treasuries, partly through inter-dealer broker electronic trading, partly dealer-to-client) and the repo market (borrowing against Treasury collateral, mainly intermediated by dealers). A market this large and growing must attract different types of investors, including price-sensitive high-frequency traders and hedge funds.
— Ellen Correia GolayHigh-frequency traders went from zero to the main force in electronic markets
Golay calls these firms principal trading firms (PTFs), mostly employing high-frequency strategies and trading on electronic platforms. Twenty years ago they were not in the Treasury market at all; today they may account for the majority of electronic cash market trading. The turning point was the 2014 flash rally — a large yield move that no one could explain. That is when the official sector began to truly understand the growth of PTFs in electronic markets, and it sparked the IAWG's work to study market structure and obtain better data.
— Ellen Correia GolayPrimary dealer balance sheets have not kept pace with outstanding Treasury growth
Golay cites a chart from a Darrell Duffie paper: primary dealers' balance sheet capacity for Treasury intermediation has completely failed to keep up with the growth of outstanding Treasuries. Part of the reason is post-2008 reforms, and part is simply that the stock has grown too fast. The result is that the market has had to attract more price-sensitive investor types. She also corrects a common impression: it is not that PTFs always retreat during volatility — in other volatile periods, officials have observed increased PTF activity. But in March 2020, everyone retreated.
— Ellen Correia GolayThe essence of all-to-all is bypassing dealer matching
All-to-all trading is literally that: any participant in the Treasury market can trade with any other participant. This is not new in equities, but the Treasury market is largely over-the-counter and dealer-intermediated, so it is not the case there. Golay notes that entering the March 2020 crisis, dealers already had a lot of Treasuries on their balance sheets, and when the selling wave hit, there was no intermediation capacity left. If counterparties could be matched without going through a dealer, that might ease things. But she explicitly says that at the time most people were selling, and it is hard to imagine all-to-all perfectly solving that situation — every incremental improvement helps, though.
— Ellen Correia GolayAll-to-all is stuck on the lack of counterparty matching
One of the paper's core findings: in the off-the-run market, if you look at a 15-minute window, almost no one wants to buy the same off-the-run security you want to sell. Extend the window to a day, and the match rate rises to 60–70%. Golay mentions possible innovations, such as an end-of-day batch auction; some institutions already have such capabilities. But to date, no case in this area has truly taken off successfully. She also notes that expanding central clearing could push the transition to all-to-all, because you would not need bilateral clearing arrangements with every counterparty — just connect to a central counterparty.
— Ellen Correia GolayOff-the-run is 97% of outstanding but a liquidity desert
Off-the-run refers to older Treasuries, from those issued three months ago to 29- and 30-year bonds, accounting for about 97% of outstanding Treasuries. The March 2020 dash for cash selling was mainly off-the-run, and the off-the-run market is dealer-intermediated, with no all-to-all. Golay and colleagues at the Board of Governors and the New York Fed used TRACE data collected by FINRA for empirical work, with transaction-level data visible only to the official sector. The conclusion: the older the Treasury, the worse the liquidity — larger price impact, lower volume, wider bid-ask spreads.
— Ellen Correia GolayThe cheapest-to-deliver can revive liquidity
Another finding from the paper: when an off-the-run Treasury becomes the cheapest to deliver into a Treasury futures contract, its liquidity improves relative to other off-the-run securities. This suggests that part of the off-the-run problem is trading activity itself — with trading activity, liquidity improves; without it, liquidity deteriorates. On policy implications, Golay mentions that Treasury buybacks can create trading activity around off-the-run securities and improve liquidity; central clearing makes clearing smoother; as for reducing issuance frequency and increasing individual issue size, the paper has no definitive conclusion, because investors also like the finer granularity of monthly issuance.
— Ellen Correia GolayTBAC put the brakes on expanding transparency
At a recent TBAC meeting, some members suggested expanding transparency of Treasury trading data: there is already market-wide aggregate statistics and transaction-level data for on-the-run securities; they suggested considering publishing transaction-level data for Treasury bills and more frequent on-the-run data. But TBAC expressed caution about expanding transparency in other areas, including off-the-run and the TIPS market. Golay says this is interesting because data transparency is precisely the focus of the IAWG's recent work, and it was listed as a priority in 2021. She personally believes small incremental transparency is beneficial, but understands that in less liquid markets, releasing too much information can make intermediation very difficult.
— Ellen Correia GolayThe central clearing deadline is right around the corner
Golay gives the timeline: the deadline for expanding central clearing in the cash market is this December, and for the repo market it is next June. In scope, the cash market is mainly electronic trading through inter-dealer brokers, i.e., currently uncleared PTF trades; the repo market is the vast majority. In size, $2–2.5 trillion in the repo market needs to move into central clearing, while the cash market is in the hundreds of billions. She specifically mentions one exemption: central banks.
— Ellen Correia GolayThe SRF name change was to remove the stigma
Last year there were several initiatives to improve the effectiveness of the SRP: introducing another morning operation, raising the participation cap to full allotment, and a change in communication. The purpose of the name change was to clarify that the SRP is just an ordinary open market operation, like pre-crisis repo, and should be used whenever it is economically advantageous, rather than being a backstop that should not be used. Golay says this was the original intent of the SRP, but they found there was misunderstanding. Surveys of primary dealers and the Board's survey of senior financial officers show that these changes increased willingness to use the SRP, making it more able to influence money market rates.
— Ellen Correia GolayIn their own words · checked verbatim
primary dealer balance sheet to Treasury market intermediation has not grown at all with the pace of growth in Treasuries outstanding
Ellen Correia Golay16:33
I don't think it's always the case that the PTFs will pull back in volatility, but in that case, it did happen. In that case, everyone pulled back.
Ellen Correia Golay17:38
every incremental improvement in market structure could contribute to making a situation like that more sustainable
Ellen Correia Golay20:46
if you're looking in a 15-minute increment, and you're trying to sell a particular off-the-run security, there's not many folks who want to buy that same security. If you look over a day increment, I think it goes up to 60% or 70% can match off.
Ellen Correia Golay22:51
When there is trading activity because the security is cheapest to deliver, its liquidity improves. When there's not a lot of trading activity, as is typical with a regular seasoned off-the-run, its liquidity deteriorates.
Ellen Correia Golay31:15
in the parts of the market that are less liquid, if too much information is released, it can make it really hard to intermediate those segments
Ellen Correia Golay38:36
if it's in the money, if it makes sense for your firm, go ahead, please use it.
Ellen Correia Golay46:50
Figures
| Outstanding Treasuries | $30 trillion (end-2025, CBO data) | 11:26 |
| Off-the-run share of outstanding Treasuries | About 97% | 29:06 |
| On-the-run average daily volume | $56.3 billion | 32:19 |
| First off-the-run average daily volume | $5.5 billion | 32:19 |
| Second off-the-run average daily volume | $1.6 billion | 32:19 |
| Repo market volume needing to move to central clearing | $2–2.5 trillion | 43:44 |
| Cash market volume needing to move to central clearing | Hundreds of billions | 43:44 |
| Repo market central clearing deadline | Next June | 43:44 |
Glossary
- all-to-all trading
- Any participant in the market can trade directly with any other participant, without dealer intermediation.
- off-the-run
- Older Treasuries, as opposed to the most recently issued on-the-run securities.
- principal trading firms (PTFs)
- Non-dealer institutions, mostly employing high-frequency strategies, that trade Treasuries on electronic platforms.
- central clearing
- Clearing trades through a central counterparty, replacing bilateral clearing arrangements.
- cheapest to deliver
- The cheapest security that can be delivered into a Treasury futures contract, which sees more active trading.
- agent clearing
- After trading with a counterparty, clearing is completed through another clearing intermediary.
How to listen
Investors, traders, and macro researchers focused on Treasury market structure, the market-making ecosystem, and fixed-income liquidity.
The first ten minutes or so of pleasantries and personal résumé review can be skipped.