On the eve of the biggest boom in U.S. bond sales since World War II, cracks are appearing in the exclusive Wall Street club responsible for ensuring the market functions smoothly.
For decades, the firms, known as primary dealers, have sat at the nexus of the Treasuries market, buying newly issued bonds to disseminate throughout financial markets and trading directly with the Federal Reserve. This relationship has helped the Fed implement its policy goals, yet the implosions of recent months suggest that the group is under duress.
Dominated by big banks like J.P. Morgan Chase and Goldman Sachs Group, the 24 primary dealers struggled to keep money moving within the core of global finance during the coronavirus panic in March. The Fed deployed a series of unprecedented interventions in response, including trillions of dollars worth of emergency funds — and inadvertently fueled debate on the need for reform.
One proposed solution: end Wall Street's near-monopoly on club membership. Bond giant Pacific Investment Management Co. argues that asset managers should be included in the group. That could benefit the Newport Beach, Calif.-based firm and would add trillions of dollars to the collective firepower of primary dealers, further boosting the influence of these investing behemoths.
"Certainly increasing the number of primary dealers would be useful. Instead of increasing it to smaller dealer financial institutions, widening it out to larger asset managers seems a better bang for your buck," PIMCO economist Tiffany Wilding said in an interview. "The Fed's programs and policies will be more efficiently transmitted throughout the financial system if it opens up its operations to a broader set of counterparties."