Bank capital constraints didn't worsen bond selloff -NY Fed
NEW YORK Oct 16 (Reuters) - The dramatic Treasuries selloff in May and June of this year was worsened by banks paring back their activities because of reduced risk appetite for bonds, rather than because the banks faced capital constraints from new regulations, researchers at the New York Federal Reserve said on Wednesday.
Benchmark 10-year Treasuries yields surged from 1.63 percent on May 2 to 2.74 percent on July 5, after comments from Federal Reserve Chairman Ben Bernanke raised fears that the Fed was closer to paring back its $85 billion bond purchase program, causing banks and investors to dump the debt.
During this period, banks reduced their long positions in fixed income at a pace that was only otherwise seen during the height of the 2008 financial crisis, the bond market selloff of 1994 and the Russian financial crisis of 1998, researchers said.
But arguments that the selloff was worsened by regulations that require banks to hold more capital, and in turn have reduced their capacity to hold and make markets in bonds are false, the New York Fed said.
Dealers that had the most ability to take on risk before the bond selloff actually sold more bonds during May and June than dealers that faced the most capital constraints, suggesting that they were actually motivated by reduced risk appetite.
"Dealers unwillingness to supply liquidity amplified the sharp rise in rates and volatility," the researchers said in the report. "Dealers were less willing to employ their balance sheets as market participants reassessed fixed-income valuations and repriced interest rate risk in response to heightened uncertainty around the stance of monetary policy."
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