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Effects of Weakness in Auctions on Demand and Leverage
The recent weakness in US Treasury auctions indicates a decrease in demand, especially from foreign buyers, including offshore hedge funds. This decline in foreign demand is causing primary dealers to be left with unsold bonds, which affects their leverage capacity. To address this, the International Derivatives Association has suggested that the Federal Reserve exclude treasuries from banks' leverage calculations, allowing them to hold unlimited amounts without impacting leverage ratios.