Main traders are forced to be "marginalized"? The allocation ratio of the 10-year US Treasury bond auction hit a new low since 2003.

On Wednesday, there was a historic change in the monthly auction of 10-year US Treasury bonds held by the US Department of the Treasury, with the allocation to Wall Street's primary dealers dropping to 4.2%, the lowest record since the Treasury began publishing bidding data in 2003. This result highlights the continued decline in the participation of primary dealers in the expanding US Treasury market. Currently, there are 25 primary dealers designated by the Federal Reserve, who must participate in all Treasury bond auctions and take on the responsibilities of underwriting and providing market liquidity. However, in this auction, only 4.2% of the bonds were allocated to the proprietary accounts of primary dealers, with the rest going to direct bidders and indirect bidders. Direct bidders include large asset management companies, pension funds, and other institutions, while indirect bidders include foreign central banks and sovereign wealth funds. In a previous auction in July for 7-year Treasury bonds, primary dealers also received only 4.1% of the allocation, setting a new historical low for regular Treasury bond auctions. The auction for 3-year Treasury bonds held on Tuesday similarly set a new record low for that maturity. This trend indicates that the dominant position of primary dealers in the Treasury market is being gradually weakened. Industry insiders point out that the long-term decline in the allocation to primary dealers is mainly due to two reasons: first, the expansion of the US Treasury market has not been matched by the growth in the financial strength of primary dealers, leading to a dilution of their ability to underwrite new bonds; second, the rise of passive investment tools such as index mutual funds and exchange-traded funds (ETFs) has diverted the share from the primary dealers as these funds automatically allocate to Treasury bonds to match benchmark indices. Until the financial crisis in 2008, primary dealers almost monopolized the primary distribution market for US Treasury bonds and typically received over 80% of the auction allocation, with the lowest not below 60%. However, this situation has completely changed today. From a market perspective, the low allocation to primary dealers is not necessarily a bad thing. As more Treasury bonds flow to long-term investors, it means that there is less selling pressure on these bonds, helping to ease selling pressure in the secondary market and stabilize yields. However, former partner at BTG Pactual Asset Management and former primary dealer bond trader John Fath warned that this trend could also pose risks. He pointed out that if primary dealers are frequently marginalized in auctions, it will weaken their bidding enthusiasm and may even lead to a situation where primary dealers are completely squeezed out of the auctions within the next five years. Fath said that this would bring pain to traders who must participate in bidding and hedge in advance. If primary dealers are unable to get the allocation they desire in auctions, they often have to buy back bonds at higher prices in the secondary market, which could lead to a sharp decline in yields, triggering a sharp rebound in the market similar to what occurred after the auction on Wednesday. He also emphasized that if he were the Treasury Department or the New York Fed, he would be concerned about this trend. With the high US fiscal deficit and record-breaking issuance of Treasury bonds, the structural shift in investors has become a long-term trend. Long-term funds such as global central banks and large asset management companies are gradually becoming the main players in US bond auctions, while the role of primary dealers is shifting from dominant distribution to maintaining liquidity and market regulation. Analysts believe that if this trend continues, the price formation mechanism of the US Treasury market may become more dependent on the allocation behavior of overseas investors and passive funds, which may increase market volatility. For policymakers, balancing the incentives for primary dealers and market competition will become a key issue to be urgently addressed in the coming years.