“The markets are, because of the tight ranges, very quiet,” said John Fath, a former head Treasury trader at Zurich-based UBS who’s now a principal at investment firm BTG Pactual in New York, which manages $2.5 billion. “Then to add insult to injury you have direct bidding going on in the Treasury, where that’s at least one part of the market where you’re able to make a little money, and now that’s not even giving you an edge.”
The yield on 10-year Treasury notes has remained between 1.58 percent and 2.06 percent over the past six months, a narrow range for traders trying to book profits on price swings. That’s also made it difficult for banks trying to justify the cost of employing 30 traders in a primary dealership, Fath said.
“The primary dealers are kind of in a bind here in the sense that they’re being required to buy securities from the Fed, but they’re doing so with a lot less information than they’ve had in the past,” said Bitsberger of BNP Paribas. “Maybe the Fed needs to look at primary dealers differently and not necessarily require them to bid in all auctions.”
Jonathan Freed, a spokesman for the New York Fed, declined to comment.
BlackRock’s Prager said trading Treasuries eventually will become a more electronic market and that the role of primary dealers will change.
“Primary dealers play a critical role, but it’s much reduced,” said David Jones, 74, who rose to vice chairman during 30 years at Aubrey G. Lanston & Co., one of the original primary dealers before it closed in 2002. “The world has changed. The technology itself has changed so much.”