Wall Street benefits from Fed and Treasury

By Henny Sender, Financial Times

On a steamy July morning in New York recently, the US Federal Reserve, in accordance with announced plans, began purchasing $3 billion in government bonds maturing between February 2021 and 2026.

Prices rose in anticipation of the Fed move.

Some two hours later, the US Treasury auctioned $39 billion in five-year notes.

Prices for government debt dipped on expectations of increased supply.

So goes another day in the market for US government securities. The Fed buys debt to support the markets while the Treasury auctions debt to pay for government spending.

Wall Street stands in the middle, taking its cut every time. In recent months, that cut has been sizeable.

The new world of government debt trading has been marked by the widening of spreads between bid and offer prices — the stuff of Wall Street profitability — following the demise of Lehman Brothers.

There are fewer primary dealers through which government securities are bought and sold — 18 compared with 31 a decade ago — and they are more likely to focus on handling customer orders than putting their own capital at risk.

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