Treasury Market Takes No Prisoners --- Primary Dealers Are Hardest Hit
NEW YORK -- Investors who bought U.S. Treasury bonds this year have booked modest returns. But the folks who trade the government's debt are losing their shirts.</br></br>Although $100 billion of Treasury securities are bought and sold daily on Wall Street, making the Treasury bond market by far the single biggest securities market in the world, most bond traders can't make any money.</br></br>The problem: Too many bond dealers chasing too few customers have squeezed profit margins to the bare bones. Ten years ago, a dealer typically could expect to make a $1,250 profit on a $1 million trade of Treasury notes, said Richard M. Kelly, president of bond dealer Aubrey G. Lanston & Co. Now, that profit has shrunk to just $312.50, he said.</br></br>Nowhere is the suffering worse than at the nation's primary dealers, an elite group of big commercial banks and brokerage firms that buy and sell government bonds directly with the Federal Reserve Bank of New York as it executes monetary policy. They also are required to step up and buy bonds at every Treasury auction of government securities; the dealers try to quickly resell the securities.</br></br>"It's a very tough business," said Thomas Pura, a partner at Goldman, Sachs & Co. and chairman of the government securities division at the Public Securities Association, a trade group. "Spreads really are razor-thin."