PAC Pacific Current Group Ltd

Wells Fargo Securities LLC joined the elite club of primary dealer banks for the U.S. government bond market on Monday.

The news was released by the Federal Reserve Bank of New York.

Wells Fargo becomes the 23rd primary dealer, which trades directly with the N.Y. Fed and is obligated to underwrite U.S. government debt sales.

It was the first time the N.Y. Fed added a new member to the club since Feb 2014 when TD Securities (USA) LLC was named a primary dealer.

Analysts say a larger pool of dealers will benefit the Federal Reserve as it needs counterparties to mop up excess liquidity pumped into the banking system since the 2008 financial crisis. The Fed ended its bond buying program in 2014 and raised short-term interest rates in December for the first time since 2006. Fed officials have signaled a slow path of normalizing interest rate policy amid uncertain global growth outlook.

Being a primary dealer carries perks for banks too.

A spokesman at the NY Fed declined to comment.

Though the firms have to meet certain standards, they benefit by being able to attract more business in the Treasury market. It also raises the firm's profile, which in turn could boost business in trading and dealing in the broader credit markets.

As counterparties to the Fed, they meet with Fed policy makers as well as Treasury officials regularly to discuss funding needs, auction schedule changes and the interest-rate outlook.

"Primary Dealership will allow us to better serve our existing customer franchise and is a logical extension of our client-focused business model," said Walter Dolhare, head of Wells Fargo Securities' Markets Division.

Still, traders say the allure of being a primary dealer has been dimmer compared with the era before the crisis.

Tighter banking regulations have pushed big dealer banks to pull back on fixed income trading. Facing stricter capital requirements to beef up their balance sheet, they become more hesitant to connect buyers with sellers in the bond market.

In addition, primary dealers are competing with a wider pool of investors, especially as hedge funds and high frequency trading firms have entered into Treasury bond markets.

The structural changes in the bond market have raised concerns over liquidity.

Regulations and investors are still struggling to pinpoint the exact reason causing the " flash crash" in Oct. 2014 for the yield on the benchmark 10-year Treasury note. The yield tumbled and then quickly reversed in short order and many said thinner liquidity magnified the violent swings.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

April 18, 2016 17:55 ET (21:55 GMT)

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