The U.S. Treasury Department should offer a standing facility to swap less-liquid off-the-run securities for on-the-run bonds to avoid triggering sharp market movements, BNP Paribas Investment Partners said in a proposal.
Bloomberg News reports that balance sheets of electronic traders aren’t big enough to support larger positions in off-the-run bonds and a mechanism allowing for an exchange would mean market participants could better hedge their books, the unit of BNP Paribas said in a report sent to the Treasury as well as other regulators, electronic market makers and some central banks.
The asset manager’s proposed debt-exchange mechanism would add needed liquidity to the off-the-run securities and also concentrate the market for the most recently sold debt --known as on-the-runs, according to the note released Wednesday. That would enable market participants to better manage risk related to debt holding, even on turbulent days such as October 15, 2014.
“Our idea would supplement, not displace, all the existing machinery in place in the Treasury market, from traditional voice trading to electronic market-making, and help improve liquidity,” Thomas Philips, global head of risk at BNP Paribas Investment Partners, said in an interview.
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