At a time when Wall Street banks say they’re running out of reasons to trade with the US government, Wells Fargo & Co is jumping into the market.
For Wells Fargo, though, it’s not so much about dealing with the US itself as it is about the other major clients that can be won over once a bank has earned its primary-dealer credentials. The world’s central banks, a growing force in bond markets everywhere, prefer to trade with institutions that are designated trading partners with the Federal Reserve. People with direct knowledge of Wells Fargo’s decision said that it was this sizeable investor group that prompted them to sign up.
“There are some large investors that will only do business with a primary dealer,” said Kevin McPartland, head market- structure analyst with financial-services consulting firm Greenwich Associates. “The intangible credibility that comes along with that is valuable.”
The brokerage arm of Wells Fargo became the 23rd primary dealer on April 18, joining a select group that bids at Treasury auctions and helps the Fed carry out policy. 
The role’s trading opportunities should be a boon at a time when the European Central Bank and the Bank of Japan are buying debt to stoke economic growth, while countries from China to Saudi Arabia have been burning through foreign reserves to defend their currencies or raise much-needed cash.
Still, Wells Fargo is making the move as other Wall Street banks baulk at the responsibilities that come with the title. The dealer role isn’t as lucrative as it used to be, according to three current and former heads of trading desks. Wells Fargo is the first addition to the list in over two years, and the group is down from a high of 46 in 1988.
Before the financial crisis, primary dealers acted as underwriters for most of the US government’s debt issuance, and were the main private-sector trading partners of the Fed. These days, dealers aren’t the main buyers of Treasury auctions. And regulatory balance-sheet restrictions make it more of a burden to bid for their pro-rata share of Treasury auctions, traders say. A total of $2.1tn of debt was auctioned in 2015, according to the Securities Industry and Financial Markets Association.
“Auctions reveal what is a common theme in today’s market: the diminution of the primary dealer’s influence,” wrote representatives from Daiwa Capital Markets, a primary dealer, in an April 22 response to a Treasury Department request for information about the evolution of the $13.4tn market.
Dealers bought 35% of Treasury auctions last year, down from 67% a decade ago, according to data compiled by Bloomberg. Investors who bid directly with the Treasury bought 10% of new debt last year, totaling nearly $200bn. A decade ago, they bought 1.1% of new securities, or $7.5bn.
What’s more, the Fed started trading with a broader range of firms when it moved to raise interest rates last year. To keep its benchmark borrowing rate above 0.25%, it started to offer reverse repurchase agreements directly to 13 government-sponsored enterprises and more than 100 money-market funds. Less than a third of those money-market funds are managed by divisions of banks that also serve as primary dealers.
Wells Fargo became a primary dealer to help advance an expansion of its bond-trading business, according to the people familiar with its decision, who asked not to be identified because they’re not authorised to speak publicly on the matter. The bank was already one of the top 20 Treasuries-trading partners for money managers before it earned the status, according to early 2015 data from Greenwich Associates. It’s also the 10th biggest underwriter of investment-grade corporate debt this year, according to data compiled by Bloomberg.
“The scope and scale of what we’ve been doing, it’s been at the level of a primary dealer for a long time,” Elise Wilkinson, a spokeswoman for Wells Fargo, said last week. She declined to comment further on the timing or motivation of the move.