Dealer Treasury circulation collapse

Trading between Treasury dealers appears to have fallen sharply, with a market observer pointing to roughly half the prior level of dealer-to-dealer circulation in recent New York Fed data. (newyorkfed.org) The New York Fed’s primary dealer statistics are updated weekly and break out outright Treasury transactions by counterparty, including trades done “with inter-dealer brokers,” the main channel dealers use to trade with one another. The Fed says those figures run from January 28, 1998 to the present and are based on weekly submissions from primary dealers. (newyorkfed.org, newyorkfed.org, newyorkfed.org) In plain terms, dealer-to-dealer circulation is the market’s internal plumbing: one dealer buys a Treasury, another takes it on, and inventory keeps moving instead of sitting on a balance sheet. When that flow slows, each trade uses up more dealer capacity for longer. (newyorkfed.org, newyorkfed.org) That matters in a market with more than $30 trillion of marketable Treasury debt outstanding as of February 28, 2026. The New York Fed said on April 2, 2026 that Treasury liquidity is followed closely because the market finances the government, helps the Federal Reserve implement monetary policy, and is used widely to manage interest-rate risk. (libertystreeteconomics.newyorkfed.org, sifma.org) Primary dealers are the firms expected to bid in Treasury auctions and make markets for the New York Fed and other clients. If they recycle less inventory among themselves, more bonds can remain parked on dealer balance sheets or move more slowly into customer hands. (newyorkfed.org, home.treasury.gov) Federal Reserve researchers have already tied Treasury market stress to dealer balance-sheet limits. A 2023 New York Fed staff report found that when dealer balance-sheet utilization gets high enough, Treasury liquidity becomes much worse than yield volatility alone would predict. (newyorkfed.org, bis.org) A separate 2024 Federal Reserve note showed that matched repo intermediation still enlarges dealer balance sheets because some financing trades do not net cleanly across settlement channels. That means slower turnover in cash Treasuries can feed directly into the financing side of the market. (federalreserve.gov, libertystreeteconomics.newyorkfed.org) The broader market is not small in absolute terms. SIFMA said average daily Treasury trading volume reached $1.29 trillion through March 2026, up 23.0% from a year earlier, so the warning is about where trading is happening and how easily dealers can pass risk, not about Treasuries disappearing from portfolios. (sifma.org) The New York Fed also said this month that liquidity worsened markedly after the April 2, 2025 tariff announcement before improving as volatility eased. A drop in interdealer circulation would fit the same official concern: Treasury liquidity can look adequate in calm periods and then thin quickly when dealers need balance-sheet room most. (libertystreeteconomics.newyorkfed.org, newyorkfed.org) The social-media chart that sparked the discussion is best read as a warning light, not a full market verdict, because the Fed says primary dealer submissions are not audited and the post did not publish a formal methodology. But if interdealer Treasury circulation has in fact fallen back toward pre-2019 levels, the market’s shock absorbers are thinner than the headline trading totals suggest. (newyorkfed.org, newyorkfed.org)