The Rise of Primary Dealers in U.S. Treasury Auctions and Its Implications for Bond Investors

The U.S. Treasury market, the largest and most liquid fixed-income market globally, has seen a significant shift in recent years. Primary dealers-authorized institutions that underwrite and distribute Treasury securities-now play an increasingly central role in auctions and secondary trading. This rise, driven by regulatory adjustments and surging Treasury issuance, has raised critical questions about market concentration and liquidity risks for bond investors.

Regulatory Tailwinds and Dealer Capacity

The Supplementary Leverage Ratio (SLR), a regulatory requirement for banks to maintain a minimum leverage ratio of 5% at the Bank Holding Company (BHC) level, has historically constrained primary dealers' ability to hold large Treasury positionsAssessment of Dealer Capacity to Intermediate in Treasury and Agency MBS Markets^[1]. However, as of June 2024, the six largest dealers, including J.P. Morgan Securities and Wells Fargo Securities, demonstrated substantial headroom to expand intermediation activities by over 300% while remaining within SLR limitsAssessment of Dealer Capacity to Intermediate in Treasury and Agency MBS Markets^[1]. This capacity has been further bolstered by the Federal Reserve's temporary exemptions of Treasuries from SLR calculations during periods of market stress, such as the early stages of the pandemicEvidence That Relaxing Dealers' Risk Constraints Can Make the Treasury Market Liquid^[3].

The Federal Reserve's balance sheet normalization, which began in June 2022, has also amplified demand for dealer intermediation. The market value of publicly held Treasury securities surged from $8.3 trillion in 2012 to $22.9 trillion in July 2024Treasury Market Resiliency and Large Banks' Balance Sheet Constraints^[2], outpacing the 80% growth in dealers' gross positions over the same period. This imbalance underscores a growing challenge: maintaining liquidity as the Treasury market expands.

Market Concentration and Systemic Risks

While the primary dealer system includes 22 institutions, the top five-J.P. Morgan, Goldman Sachs, BofA Securities, Morgan Stanley, and Citadel-dominate auction participation. SIFMA data reveals that average daily trading volume in U.S. Treasury securities reached $1.071 trillion in August 2025, a 18.8% year-over-year increaseUS Treasury Securities Statistics - SIFMA^[4]. Though exact auction market shares remain opaque, the New York Fed's weekly data tool highlights the concentration of activity among these firms. For instance, J.P. Morgan and Goldman Sachs consistently account for over 20% of weekly Treasury transactionsPrimary Dealer Statistics - Federal Reserve Bank of New York^[5].

This concentration raises concerns. In March 2020, during the pandemic-induced market turmoil, banks faced heightened capital demands due to deposit inflows and loan growth, limiting their ability to support liquidityEvidence That Relaxing Dealers' Risk Constraints Can Make the Treasury Market Liquid^[3]. The reliance on principal trading firms (PTFs), which prioritize short-term strategies, further exacerbates fragility during stress events. PTFs, while active in normal conditions, may withdraw liquidity when volatility spikes, as seen in 2020 and 2023 bank runsEvidence That Relaxing Dealers' Risk Constraints Can Make the Treasury Market Liquid^[3].

Liquidity Risks for Bond Investors

For bond investors, the implications are twofold. First, concentrated dealer activity increases the risk of liquidity dislocations. If a few dealers face capacity constraints or strategic withdrawal, bid-ask spreads could widen, and price discovery could become less efficient. Second, the growing role of PTFs introduces asymmetry in liquidity provision. While PTFs thrive in stable markets, their absence during crises could leave investors exposed to sharp price swings.

Recent data from the New York Fed's Primary Dealer Statistics tool illustrates this dynamic. In Q2 2025, secured financing by dealers rose 43% year-over-year, reflecting increased reliance on repo markets to fund Treasury inventoriesTreasury Market Resiliency and Large Banks' Balance Sheet Constraints^[2]. This leverage, while enabling higher intermediation, also amplifies systemic risks if repo markets freeze-a scenario witnessed during the 2008 financial crisis.

Policy Adjustments and Investor Strategies

To mitigate these risks, policymakers have proposed recalibrating the SLR and Tier 1 leverage ratios to allow banks to hold more Treasuries without compromising stabilityEvidence That Relaxing Dealers' Risk Constraints Can Make the Treasury Market Liquid^[3]. Such adjustments could enhance dealer capacity to absorb the growing supply of securities. For investors, diversification across dealer channels and monitoring of repo market health are critical. Additionally, central clearing mandates for Treasury transactions, set to expand in 2025, may reduce counterparty risk and improve transparencySIFMA's U.S. Treasury Central Clearing Report^[6].

Conclusion

The rise of primary dealers in U.S. Treasury auctions reflects a complex interplay of regulatory, market, and structural forces. While their expanded capacity supports liquidity in normal conditions, the concentration of intermediation among a few firms-and the reliance on PTFs-pose significant risks during periods of stress. For bond investors, understanding these dynamics is essential to navigating a market that remains both a cornerstone of global finance and a potential source of systemic vulnerability.