Dealers Struggle to Digest Bond Supply as Balance Sheets Stuffed

Elevated rates in the funding market and stubbornly high balances at a key Federal Reserve facility suggest primary dealers are struggling to take down the onslaught of Treasury supply.

Treasury issuance has swelled in recent years to fund government deficits and replace securities rolling off the Fed’s balance sheet as part of quantitative tightening, or QT. As a result, primary dealers have had more supply to digest, and with holdings near all-time highs, their normal function as an intermediary in the market is constrained.

As a result, the rate for overnight general collateral repurchase agreements, the benchmark for short-term financing ...