<p>I assume this refers to the U.S.</p>
<p>(Also, see this question/answer: <a href="https://economics.stackexchange.com/questions/13449/primary-dealers-in-treasury-auctions">link to question</a>.)</p>
<blockquote>
<p>If so is the reason it is said that the government can always pay their debt because the primary dealers are obliged to always loan to the government?</p>
</blockquote>
<p>That’s one reason, but most people are unaware of this angle. I would argue that the usual reason given is that the central bank can buy government bonds in “unlimited” size.</p>
<p>There are limitations on this, and government debt issuance, but they can be bypassed at any time by issuing a new law. Another thing to keep in mind that jurisprudence around Treasury default is not settled, there are arguments that a Treasury default is a “more illegal” option than the Treasury not paying for spending that was authorised by Congress.</p>
<p>From the perspective of underlying economics, the reality that there is an open-ended buying capacity at the central bank is why people refer to currency sovereign debt as default risk free.</p>
<blockquote>
<p>Is there a case in which the primary dealers could refuse to buy treasuries?</p>
</blockquote>
<p>They submitted to an agreement to bid, so not really. At most, the bids might not cover the auction.</p>
<blockquote>
<p>In general, are the primary dealers incentivized or compelled under the law to always bid for the treasuries?</p>
</blockquote>
<p>Incentivised - certainly. They get first chance to bid on Treasuries, and their job is to have a sales force that is capable of finding bidders who will pay a higher price in the secondary market. This is why firms become primary dealers in the first place.</p>
<p>“Compelled under law” is a strong phrase; they have a binding contract to bid. Since primary dealers are financial entities whose overall activities are regulated by the Federal government, they would put themselves in a very awkward situation if they tried to break a legal agreement with the government.</p>

CC BY-SA 4.0
2020-07-11T15:20:01.647Z
What I get from the above provided link is that banks are incentivised to gain the privilege of  becoming a primary dealer because they would get access to the primary market allowing them to make a profit in the secondary market. Once a bank gains the primary dealer status the Fed has a set of policies to follow to keep that status. Meaning that in theory instead of refusing to buy treasuries a bank could forgo its primary dealer status.
user3181821
CC BY-SA 4.0
2020-07-11T15:26:49.000Z
Also, a more likely scenario (instead of primary dealers refusing to buy treasuries) in the case that primary dealers would consider buying treasuries not an attractive option anymore, they could bid very low which would hike up the interest rates and potentially lead to a sovereign debt crisis.
user3181821
CC BY-SA 4.0
2020-07-11T15:35:43.520Z
Then, in the scenario described in the above comment. The Fed would be motivated to start buying the treasuries at higher prices in a large scale incentivising them to bid up the prices and lowering the interest rates, in order to avoid a crisis.
user3181821
CC BY-SA 4.0
2020-07-11T16:07:28.250Z
(1)They have the obligation when they are a primary dealer. They can resign that status, but until they do, they have a contractual obligation to bid. (2) Can they bid low? I believe that part of the obligation is that they cannot be far off where secondary market trading is. You are inventing a scenario where every single bond trader decides to form a cartel, and there are massive profits to be made by breaking from the cartel.
Brian Romanchuk
CC BY-SA 4.0
2020-07-11T16:13:45.257Z
(2) Well, I didn't mean it like. I meant it more like if the primary dealers were pushed to bid low because something external like lower demand on the secondary market.
user3181821
CC BY-SA 4.0
2020-07-11T16:16:11.517Z
I guess in this case in theory the federal reserve would step in to rise the demand as a "buyer of last resort".
user3181821
CC BY-SA 4.0
2020-07-11T19:07:52.673Z
Bond yields go up and down. There’s nothing particularly interesting about that; that’s what markets do. That is not going to scare Primary Dealers.
Brian Romanchuk
CC BY-SA 4.0
2020-07-11T12:27:33.120Z
2020-07-11T12:27:33.120Z
Brian Romanchuk
<p>It is said that treasuries are the highest quality debt because the government can always &quot;print money&quot; to pay the debt.</p>
<p>But, isn't so that the ones printing the money to loan to the government are the primary dealers.</p>
<ol>
<li><p>If so is the reason it is said that the government can always pay their debt because the primary dealers are obliged to always loan to the government?</p>
</li>
<li><p>Is there a case in which the primary dealers could refuse to buy treasuries?</p>
</li>
</ol>
<p>In general, are the primary dealers incentivized or compelled under the law to always bid for the treasuries?</p>

CC BY-SA 4.0
2020-07-11T09:07:00.340Z
Does this answer your question? [Primary dealers in treasury auctions](https://economics.stackexchange.com/questions/13449/primary-dealers-in-treasury-auctions)
Giskard
CC BY-SA 4.0
2020-07-11T09:10:35.673Z
Also, in case no one wanted to lend to the government, it could literally print money, if it wanted to. (The extended government, not the cabinet, to be more precise.)
Giskard
<government-debt>
Are the primary dealers obliged to buy treasuries no matter what?
user3181821
# Are the primary dealers obliged to buy treasuries no matter what?

(Asked by: username_0 on 2020-07-11)

It is said that treasuries are the highest quality debt because the government can always "print money" to pay the debt.

But, isn't so that the ones printing the money to loan to the government are the primary dealers.

1. If so is the reason it is said that the government can always pay their debt because the primary dealers are obliged to always loan to the government?
2. Is there a case in which the primary dealers could refuse to buy treasuries?

In general, are the primary dealers incentivized or compelled under the law to always bid for the treasuries?

**Tags:** government-debt
> **Comments:**
> **username_1**: Does this answer your question? [Primary dealers in treasury auctions](https://economics.stackexchange.com/questions/13449/primary-dealers-in-treasury-auctions)  
> **username_1**: Also, in case no one wanted to lend to the government, it could literally print money, if it wanted to. (The extended government, not the cabinet, to be more precise.)  

---

## 1 answers

### Answer by username_2 on 2020-07-11. Score: 2 | Accepted answer

I assume this refers to the U.S.

(Also, see this question/answer: [link to question](https://economics.stackexchange.com/questions/13449/primary-dealers-in-treasury-auctions).)

> If so is the reason it is said that the government can always pay their debt because the primary dealers are obliged to always loan to the government?

That’s one reason, but most people are unaware of this angle. I would argue that the usual reason given is that the central bank can buy government bonds in “unlimited” size.

There are limitations on this, and government debt issuance, but they can be bypassed at any time by issuing a new law. Another thing to keep in mind that jurisprudence around Treasury default is not settled, there are arguments that a Treasury default is a “more illegal” option than the Treasury not paying for spending that was authorised by Congress.

From the perspective of underlying economics, the reality that there is an open-ended buying capacity at the central bank is why people refer to currency sovereign debt as default risk free.

> Is there a case in which the primary dealers could refuse to buy treasuries?

They submitted to an agreement to bid, so not really. At most, the bids might not cover the auction.

> In general, are the primary dealers incentivized or compelled under the law to always bid for the treasuries?

Incentivised - certainly. They get first chance to bid on Treasuries, and their job is to have a sales force that is capable of finding bidders who will pay a higher price in the secondary market. This is why firms become primary dealers in the first place.

“Compelled under law” is a strong phrase; they have a binding contract to bid. Since primary dealers are financial entities whose overall activities are regulated by the Federal government, they would put themselves in a very awkward situation if they tried to break a legal agreement with the government.

> **Comments:**
> **username_0**: What I get from the above provided link is that banks are incentivised to gain the privilege of  becoming a primary dealer because they would get access to the primary market allowing them to make a profit in the secondary market. Once a bank gains the primary dealer status the Fed has a set of policies to follow to keep that status. Meaning that in theory instead of refusing to buy treasuries a bank could forgo its primary dealer status.  
> **username_0**: Also, a more likely scenario (instead of primary dealers refusing to buy treasuries) in the case that primary dealers would consider buying treasuries not an attractive option anymore, they could bid very low which would hike up the interest rates and potentially lead to a sovereign debt crisis.  
> **username_0**: Then, in the scenario described in the above comment. The Fed would be motivated to start buying the treasuries at higher prices in a large scale incentivising them to bid up the prices and lowering the interest rates, in order to avoid a crisis.  
> **username_2**: (1)They have the obligation when they are a primary dealer. They can resign that status, but until they do, they have a contractual obligation to bid. (2) Can they bid low? I believe that part of the obligation is that they cannot be far off where secondary market trading is. You are inventing a scenario where every single bond trader decides to form a cartel, and there are massive profits to be made by breaking from the cartel.  
> **username_0**: (2) Well, I didn't mean it like. I meant it more like if the primary dealers were pushed to bid low because something external like lower demand on the secondary market.  
> **username_0**: I guess in this case in theory the federal reserve would step in to rise the demand as a "buyer of last resort".  
> **username_2**: Bond yields go up and down. There’s nothing particularly interesting about that; that’s what markets do. That is not going to scare Primary Dealers.  

---

