Dealer Positions in Securities

Dealer holdings of U.S. government and other securities are both huge and subject to erratic fluctuations. For example, during 1979, the roughly three dozen U.S. government security dealers held average daily positions of $3.2 billion in U.S. government securities and nearly $1.5 billion in the IOUs of various federal agencies. Three years earlier, in 1976, however, average daily dealer positions in U.S. government securities were more than double the average at almost $7.6 billion.
Why was there such a tremendous difference in the size of dealer portfolios during those years? Interest rates fell in 1976, creating ample opportunities for sizable dealer profits on securities held in long positions as market prices rose. In 1979, however, interest rates increased sharply, sending security prices downward. Fearing substantial losses, the dealers shifted out of long positions, especially in longer-term notes and bonds, and held mostly Treasury bills, whose prices are relatively stable. In fact, the dealers actually went short on 1-to-5-year and under-1-year government securities and held only nominal amounts of maturities exceeding 10 years