Task Force on Monetary Policy Examines Treasury Market Volatility

Before the House Financial Services Committee, Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity, witnesses focused on treasury market volatility, treasury market liquidity, and the increase in US debt.

Chair Frank D. Lucas of the new Task Force, formed in January 2025, highlighted the "fragility" of the treasury markets as evidenced by "the sudden sell-off and volatility in the Treasury market" in April 2025. He said that regulatory changes were needed to bolster the liquidity and resiliency of the Treasury market. 

The following witnesses, among others, testified: 

Jill Cetina, Professor of Finance, Texas A&M University argued that "bank deregulation is an ineffective solution to Treasury market fragility." She said that "reducing the amount of capital that banks hold against US Treasuries when Treasury market volatility is rising and stagflation is on the horizon is inconsistent with sound risk management and robust economic growth, instead increasing risks of a costly US financial stability event." Second, she said that "the Federal Reserve's use of unconventional monetary policy" (i.e. quantitative easing) "contributed to unsound fiscal policy and has been destabilizing to the US banking sector." She argued that the overuse of quantitative easing created banking sector vulnerabilities and exposed the consolidated public balance sheet to large losses. She rejected calls to exclude reserves from leverage ratios, warning it would uncap Fed balance sheet growth and worsen systemic risks. Third, she argued that strengthening resilience in the Treasury markets required "a more responsible fiscal policy," noting that high and rising government debt, shifting investor demand, and growing reliance on hedge funds have increased Treasury market volatility and fragility. Ms. Cetina said this volatility will raise borrowing costs, crowd out private investment and threaten bank balance sheets already burdened with unrealized losses. She warned that further deregulation amid adverse conditions could lead to a deeper financial crisis. 

Nathaniel Wuerffel, Head of Product for the Global Collateral Platform and Head of Market Structure BNY, said the US Treasury market is critical to financial stability, but recent episodes of dysfunction—such as the 2014 flash rally, 2019 repo stress and the 2020 pandemic—have exposed its fragility. He said BNY, which processes $2.4 trillion in payments daily and holds a third of marketable Treasuries in custody, plays a central role in supporting market infrastructure. Mr. Wuerffel endorsed the SEC's new central clearing mandate, which will require $4 trillion in daily Treasury transactions to be centrally cleared, reducing credit risk and improving resilience. However, he said successful implementation depends on resolving key issues: ensuring a level playing field across jurisdictions, narrowing the rule's scope to Treasury-only trades, avoiding rollout delays and aligning margin practices. Mr. Wuerffel also said leverage ratio requirements are constraining banks' ability to intermediate Treasury trades, especially in stress periods, and should exclude low-risk assets like cash and Treasuries. Additionally, he said liquidity would improve if Treasury securities could be more easily converted to cash through modernized Discount Window access, better collateral mobility and expanded repo options.

Ira Jersey, Chief US Interest Rate Strategist for Bloomberg Intelligence, argued that: (i) market volatility is not unusual; (ii) regulations, while aimed at reducing systemic risk, have constrained market-making capacity, leaving it unable to keep up with the expanding Treasury market; and (iii) to improve liquidity, Mr. Jersey said broad regulatory reforms are needed, noting that exempting Treasuries from the Supplementary Leverage Ratio would help, but is not a complete solution.