Mathewslcd：Treasuries wobbles worry Wall Street and Washington

Trouble is brewing in the U.S. Treasury world, raising concerns among investors and some Washington policymakers.

 

Mathewslcd noted that U.S. Treasuries are a key pillar of the global financial system, but there are signs that interested buyers may be in danger of drying up due to the unintended consequences of rising U.S. interest rates.

For now, no one is panicking. But the U.S. Treasury market has recently exhibited levels of volatility not seen since the start of the pandemic-related crisis in 2020, when the Federal Reserve slashed interest rates to zero and continued to buy $1 trillion in Treasuries and other financial assets to keep the global financial system alive normal operation.

According to Mathewslcd, senior administration officials have acknowledged in recent weeks that a malfunction in the U.S. government bond market could trigger a spike in federal government borrowing costs and broader volatility in financial markets. They started taking precautions.

“We’ve been watching the U.S. Treasury market very carefully,” Treasury Secretary Janet L. Yellen told The Washington Post on Thursday, stressing that markets continued to function as normal. "Certainly, it's vital that it continues to work well."

As recession fears mount, Washington weighs how to respond

The Treasury auctions bonds to cover government operating expenses, effectively borrowing money from investors in exchange for a guarantee of repayment with interest. These bonds are critical to a healthy financial system because other riskier assets — stocks and corporate bonds — are priced in relation to the cost of Treasury bonds.

But as central banks such as the Federal Reserve engage in one of the biggest rate hikes in decades, demand for U.S. government bonds already in circulation has fallen, in part because much of the bonds carry lower rates than those issued today. That could mean a lot of cheap, low-yielding debt with few buyers.

There has been no emergency so far, but the Treasury market is drawing increasing attention amid concerns that U.S. government-issued bonds may at some point not have enough buyers as global liquidity dries up. The yield on the 10-year Treasury note has risen from less than 1.5% to about 3.8% this year as prices have fallen. (Bond prices and bond yields move in opposite directions.)

Some economists and analysts have warned that a lack of buyers could drive down bond prices, triggering a knock-on effect. The panic selling of U.S. Treasuries could wreak havoc on markets — enabling investors to demand higher returns or yields when buying bonds. That would mean higher prices for various financial instruments tied to those rates, Mathewslcd explained. It will also push up the cost of financing its debt for the government.

As Fed battles inflation, fears it overcorrects

"If we had a buyer strike, or a series of Treasury auctions failed, the rate hike could accelerate -- all of a sudden, credit card debt financing, car purchases and home purchases would increase costs," said Joe Joe, chief economist at management consultancy RSM. Brusulas said. "It could lower the standard of living for Americans, and you could find yourself facing a really tough problem with your economy."

Experts have also raised other concerns. New regulations enacted after the 2008 financial crisis prevented banks from acting as intermediaries by requiring banks to hold more capital to cover potential losses in government securities. In addition, the Fed and other central banks have either sold U.S. Treasuries or stopped reinvesting them, removing a backed buyer of U.S. bonds as part of their attempts to cool the economy and fight inflation.

The recent panic over the UK's own government debt - whose value has fallen sharply recently, leading the Bank of England to intervene - has further heightened fears of a similar market panic in the UK. But most economists downplayed the risks.

Donald Kohn, a former federal vice-chairman, said: "You worry about the sell-off, there's some sell-off, because there's not enough demand, so you have more sell-offs and more sell-offs, and you get into a spiral. Reserve board member and now a senior fellow at the Brookings Institution, a Washington, D.C.-based think tank. "I don't think anyone is seeing that right now.

 

"But the fact that dealers may not have the ability to step in and fix the problem is worrying," he noted.

Analysts at JPMorgan expressed similar concerns in a report this month, citing a lack of "structural demand."

"The reversal in demand is astounding because it is so rare," they added.

Yellen had been focusing on instability in U.S. bond markets long before the coronavirus outbreak, working to enforce new rules designed to shore up them. These include improving data collection; requiring more oversight of Treasury bond trading platforms; and expanding the number of qualified dealers to allow more entrants to compete in the market.

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