As US debt balloons to unprecedented levels, the allure of being a Treasury market gatekeeper is rapidly fading, leaving some wondering whether the pipes can handle the flood.
The US Treasury market has mushroomed to a staggering $29 trillion, with projections pointing to an eye-watering $50 trillion in the next decade. Yet the infrastructure supporting this behemoth—the primary dealers—hasn’t grown in kind. Back in 1988, there were twice as many dealers managing a fraction of today’s debt. Now, the remaining 24 members are groaning under the weight, caught between post-financial crisis regulations and an ever-increasing supply of government bonds.
It’s like trying to shove more water through the same rusty pipes.

Created by the New York Federal Reserve in 1960, the primary dealer system was designed to keep Treasury markets humming. At its peak in 1988, there were around 46 members; today, there are just 24. Despite the shrinking ranks, these firms must bid at Treasury auctions and maintain active secondary markets—duties that, according to insiders, are increasingly untenable. The root of the problem? Regulatory constraints on capital and leverage were imposed post-2008, leaving dealers thinner than ever.

The strain isn’t just theoretical. Recent spikes in short-term repo rates—a crucial cog in the financial system—have already raised eyebrows. And let’s not forget the COVID-19 panic of 2020, when the Treasury market briefly went haywire, forcing the Federal Reserve to step in with emergency measures. It’s not just the primary dealers sweating bullets. Asset managers, hedge funds, and even former policymakers like Bill Dudley are warning of the potential liquidity crisis.

On top of that, the regulations are making things worse for the big players. In the meantime, other players are free from the burdensome capital requirements imposed on banks. Unlike primary dealers, they are not obligated to bid at auctions or provide a safety net in turbulent times. When markets get choppy, they can step aside—leaving the traditional dealers holding the bag.
Acknowledging the system’s cracks, regulators are rolling out reforms, including centralised clearing and enhanced safeguards. But there’s no silver bullet. These measures might prevent leaks, but they can’t guarantee that the plumbing won’t burst under future stress.
Add a dose of political uncertainty to the mix, making the picture even murkier. A new US administration could upend regulatory efforts, leaving markets even more vulnerable to upheaval.

In 2014, dealer holdings of Treasuries averaged $43 billion. Today, they hover nearly $400 billion—an astonishing increase underscoring the strain. Yet the pipes haven’t expanded, leaving the financial system exposed. The additional leverage ratio (SLR) requirement, introduced after 2008, is a sore spot for bankers, as it limits their ability to use capital effectively during crises.
Though Federal Reserve studies suggest banks have enough cushion to handle market-making under normal conditions, crises are another matter entirely. And with repo market disruptions still fresh in Wall Street’s memory, the next major liquidity event could test the system to its limits.
For now, Wall Street’s financial plumbers are holding it together. But with every new bond issuance, the question looms: How much more can the system take before the pipes give way?
As the volume of debt continues to rise, the Treasury market risks becoming a game of musical chairs, with fewer participants available to stabilise the situation. Without urgent reforms, the $50 trillion question is no longer if the system will break down but when.