Journal of Economic Perspectives · 2025 · [{"name": "Darrell Duffie", "affiliation": ["National Bureau of Economic Research"]}]
Abstract
Weaknesses in the design of the market for US Treasuries have reduced the effectiveness of world's favored safe-haven asset. Since the Global Financial Crisis, the market's intermediation capacity is far more constrained by the balance sheets of dealer banks, which handle virtually all investor trades. Since 2007, the total size of primary dealer balance sheets per dollar of Treasuries outstanding has shrunk by a factor of four. This trend continues because of large US fiscal deficits and post-GFC regulatory capital constraints, which are necessary for financial stability but limit the provision of liquidity under stress. For US Treasuries to remain a powerful safe haven, the intermediation capacity of the market will need to be expanded and further supported by official-sector backstops.