At the moment, no one is panicking. But the US Treasury market has recently shown a level of volatility not seen since the start of the pandemic-related crisis in 2020, when the Federal Reserve cut interest rates to zero and continued to buy trillions of dollars in Treasuries and other financial assets. To keep the global financial system working.
Senior government officials have acknowledged in recent weeks that dysfunction in US government bond markets threatens to trigger a surge in the federal government’s borrowing costs and wider turmoil in financial markets. They have begun taking preventive steps.
“We’ve been looking very carefully at the Treasury market,” Treasury Secretary Janet L. Yellen told the Washington Post on Thursday, stressing that the market continued to function normally. “It is of course important that you continue to do well.”
The Treasury auctions bonds to pay for government operations, and actually borrows money from investors in exchange for a guarantee of repayment with interest. These bonds are essential to a sound financial system, because other riskier assets — stocks and corporate bonds — are priced in relation to the cost of Treasurys.
But as central banks like the Federal Reserve Engaging in one of the largest interest rate hikes in decadesDemand for US government bonds already in circulation has fallen in part because most of that debt carries lower interest rates than bonds issued today. That could mean a glut of cheap, low-yielding debt with few buyers.
There has been no emergency yet, but the Treasury market is attracting increased attention out of concern that with liquidity drying up around the world, there may at some point not be enough buyers of US government-issued debt. With prices lower, yields on 10-year Treasuries have already risen from less than 1.5% to about 3.8% this year. (Bond prices and bond yields move in opposite directions.)
Some economists and analysts warn that the lack of buyers could cause a ripple effect by lowering the price of bonds. The shocking sale of US Treasuries could wreak havoc in the markets – giving investors leverage to demand higher yields, or returns on their bond purchases. This could mean higher prices for all types of financial instruments linked to these rates. It will also increase the cost of financing its debt to the government.
“If we had a buyers strike, or a failed series of Treasury auctions, interest rate increases could accelerate — and all of a sudden, credit card debt financing, car purchases, [and] Joe Brusolas, chief economist at RSM Management Consulting, said home purchases will rise in cost. “It could lower living standards for Americans, and you could find yourself facing a very difficult problem for your economy.”
Experts also raised other concerns. New regulations enacted after the 2008 financial crisis discouraged banks from acting as intermediaries by requiring them to hold more capital to cover potential losses on government securities. In addition, the Federal Reserve and other central banks are either selling Treasuries or no longer reinvesting them, as part of their attempts to cool the economy and fight inflation, removing a single buyer of US bonds.
The recent panic in Britain over its government debt – which has been significantly reduced in value recently, leading to the intervention of the Bank of England – has heightened fears that a similar panic could occur in the market here. But most economists underestimate the risks.
said Donald Kohn, a former vice president of Federal Board of Governors at Reserve and now a senior fellow at the Brookings Institution, a Washington, DC-based think tank. “I don’t think anyone is seeing that now.”
“The fact that traders may not have the ability to step in and sort things out is worrying,” he noted.
Analysts at JPMorgan Chase expressed similar concerns in this month’s report, citing a lack of “structural demand on”.
“The demand reversal was amazing because it was so rare,” they added.
Yellen focused on the instability in US bond markets long before the current escalation, as she worked to implement new rules intended to support them. These measures include improving data collection; require more oversight of treasury trading platforms; And expanding the number of qualified dealers to allow more entrants to bid in the market.
Despite her comments on Thursday emphasizing calm, Yellen appears to be ramping up these efforts amid the latest signs of volatility. Treasury officials asked market traders about a possible government debt buyback program, a possible indication of US government concern. The matter was also recently discussed by the Financial Stability Oversight Board, which Yellen chairs, and is expected to bring it up at its next meeting.
A major concern for Leylin, as reported by Bloomberg News This monthis the possibility of “losing sufficient liquidity in the market”.
But it also sees a compensating trend: As Treasury payments rise, more foreign investors are stepping into the market to absorb excess capacity.
“I asked who would buy Treasurys, and I think part of the answer is that they have very attractive yields,” Yellen said Thursday.
Kumal Sri Kumar, president of economic consultancy Sri-Kumar Global Strategies, believes higher interest rates will make US debt more profitable for investors, attracting more buyers to the market and easing liquidity concerns.
More broadly, many economists and financial analysts say concerns about market weakness may be exaggerated, especially now that healthy levels of US government bonds – worth nearly $600 billion – continue to be traded daily.
Historically, warnings about the risk of investors refusing to buy US government debt have not held up. Under the Obama administration, for example, Republicans and other deficit hawks have said that large deficits would risk a financial meltdown if bond buyers lose confidence in the US government. Such a crisis did not materialize.
Sri Kumar calls those warnings a “ridiculous thing”.
If you refuse to buy [long-term] Bonds, what happens next? “Treasury will have to offer a higher yield, and we will reach a better balance,” Sri Kumar said. This is not Argentina, Zimbabwe or Turkey, where investors said: interest rates are insufficient; Keep walking. That’s why I think the buyers’ strike makes no sense.”
This sentiment was underlined by a senior Treasury official, who told the Washington Post that US policy makers trust US debt markets in part because many investors around the world are seeking to buy those bonds. There are countries of big buyers, Including Japan, But even in this case, it is so 4 percent of the total.
The Treasury official said that while volatility in the bond markets is increasing, volatility is also hitting the financial sector more broadly – indicating that there are no specific risks to US bonds despite their significant importance.
It’s been a different picture lately in Britain, where most of the country’s long-term government debt has been held by pension funds. This made British bonds, or gold bonds, more vulnerable to price swings as pension funds moved in unison to dispose of those assets as their value declined.
Analysts say this type of infection is unlikely to appear in the United States.
“If you are [expect] The demand for higher yielding assets will rise, [this] “It would make the fear kind of absurd or misplaced,” said Bob Hockett, a former Federal Reserve official and now a public policy expert at Cornell University. “I don’t want to be complacent about this…but there is nothing on the horizon to expect and it is a serious competitor to the US dollar.”
However, rising bond prices could harm the US economy and government without causing disaster. If bond yields are to rise to attract investors, capital will flow into government debt — and from more productive uses, such as corporate debt that fuels investment.
The crisis scenario is a mass sale of those low-yield bonds at once. “This would be a global financial crisis scenario,” said Mark Goldwyn, senior vice president for policy at the Committee on Responsible Federal Budget, a DC-based think tank. “But I think that is unlikely. … the most likely scenario is that it would be too costly for the US government and too costly for the US economy.”
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