At this point, there is no panic. But the U.S. Treasury bond market has recently shown levels of volatility not seen since the start of the pandemic-related crisis in 2020, when it cut interest rates. the Federal Reserve went to zero and continued to buy $1 trillion in Treasuries and other financial assets. to maintain the global financial system.
Senior government officials have acknowledged in recent weeks that the failure of the U.S. government bond market could result in higher federal government borrowing costs and stock market volatility. They start taking preventive measures.
“We’ve been watching the Treasury market closely,” Treasury Secretary Janet L. Yellen told The Washington Post on Thursday, stressing that the market continued to function normally. “Obviously it’s important that he continues to do well.”
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The Treasury Department holds auctions to pay for government operations, borrowing money from investors in exchange for a guarantee of repayment with interest. These bonds are important to a healthy financial system, because other risky assets – stocks and corporate bonds – have a price relative to the price of Treasurys.
But as central banks like the Federal Reserve engage in one of the biggest interest rate hike campaigns in decades, demand for long-running U.S. government bonds has weakened in part because the Most of this debt carries a lower interest rate than bonds issued. today. This could mean an oversupply of cheap debt and fewer buyers.
There has been no emergency so far, but the Treasury bond market is attracting more attention because of concerns that as liquidity dries up around the world, there may not be enough buyers of debt issued by the US government. With prices falling, the yield on the 10-year Treasury bond has risen from less than 1.5 percent to 3.8 percent this year. (Bond and bond prices move in opposite directions.)
The lack of buyers may have the effect of putting pressure on bond prices, some economists and analysts have warned. Selling US Treasurys can distort the market – giving investors the ability to demand a higher return, or yield, on buying bonds. This means that the cost of all financial instruments associated with these fees is higher. It may also increase the cost of financing their debt.
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“If we had a buyer’s strike, or a series of failed Treasury auctions, interest rates would go up — and suddenly, credit card financing, car purchases, [and] buying real estate will increase in price,” said Joe Brusuelas, chief economist at management consultancy RSM. “It could lower the standard of living for Americans, and you could see a difficult problem for your economy.”
Experts have also raised other concerns. New rules enacted after the 2008 financial crisis discouraged banks from becoming intermediaries by requiring them to hold more capital to cover potential losses on sovereign bonds. In addition, the Federal Reserve and other central banks are selling Treasurys or not buying them back, as part of their efforts to stabilize the economy and fight inflation, removing a buyer from US bonds.
And the recent panic in Britain over government debt – which recently saw a sharp decline in rates, leading to intervention by the Bank of England – has only fueled fears that the crisis could happen here. in the market. But most economists downplay the risks.
“You worry about fire sales, the situation where some stores are and because there’s not enough demand, you sell more and you sell more and you get kind of a spiral,” said Donald Kohn, a former Federal Reserve vice president. The Reserve’s board of directors is now a senior fellow at the Brookings Institution, a DC-based think tank. “I don’t think anyone sees that right now.”
“But the fact that sellers may not have the ability to step in and minimize everything is a concern,” he noted.
Analysts at JPMorgan Chase expressed similar concerns in a report this month, citing a lack of “structural demand.”
“The return on demand is amazing because it’s so rare,” they said.
Yellen has focused on the instability in the US bond market since the current explosion, working to implement new rules aimed at stabilizing them. These measures include improving data collection; require more oversight of the Treasury trading platform; and expanding the number of eligible vendors to allow more participants to bid.
Despite her comments on Thursday that emphasized stability, Yellen appears to be intensifying those efforts amid the latest signs of volatility. Treasury officials asked market traders about a possible program to buy government debt, a possible sign of concern for the US government. The matter was also discussed by the Financial Stability Oversight Council, which Yellen chairs, and is expected to come up at the next meeting.
A major concern for Yellen, as reported by Bloomberg News this month, is the possibility of “a loss of sufficient liquidity in the market.”
But he also sees an opposite trend: As yields on Treasury bonds rise, more foreign investors enter the market to take advantage of the excess capacity.
“You asked who’s going to buy Treasurys, and I think part of the answer is that they have very attractive yields,” Yellen said Thursday.
Komal Sri-Kumar, president of economic consultancy Sri-Kumar Global Strategies, also believes that higher interest rates will make US debt more attractive to investors, attracting buyers. more to the market and alleviate liquidity concerns.
And in general, many economists and financial analysts say that concerns about market weakness may be overblown, especially now, because the level of US government bonds – there to about $ 600 billion dollars – continues to be sold every day.
Historically, warnings about the dangers of investors refusing to buy US government debt have not stopped. Under the Obama administration, for example, Republicans and other deficit luminaries have said that large deficits could lead to a financial crisis if bond buyers distrust the US government. There was no such crisis.
Sri-Kumar called the warnings “ridiculous”.
“If I refuse to buy [long-term] bond, what’s going on? The Treasury must deliver higher yields, and we will achieve better equity,” said Sri-Kumar. “This is not Argentina or Zimbabwe or Turkey, where investors say, ‘The interest rate is not enough; keep walking.’ This is why I think the buyer’s strike is unreasonable.
That sentiment was echoed by a senior Treasury official, who told The Washington Post that U.S. policymakers have confidence in the U.S. debt market in part because many investors around the world looking to buy these bonds. There are countries that are big buyers, including Japan, but even then, it’s only 4 percent of the total pool.
And if volatility rises in the bond market, volatility also hits the financial sector in general – there is no particular risk to US bonds despite their importance, Treasury officials said.
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The recent picture is different in Britain, where most of the country’s long-term government debt is held by pension funds. That made British bonds, or gilts, more vulnerable to price swings as pension funds flocked to dump those assets when prices fell.
These types of infections are rare in the United States, analysts say.
“If you [expect] demand for higher yielding assets will be higher, [this] will make the fear silly or misplaced,” said Bob Hockett, a former public policy expert at Cornell University. “I don’t want to be complacent about it… but there’s nothing A serious challenger to the US dollar is on the horizon.”
However, a rise in bond rates can harm the economy and the US government without causing harm. If the money supply has to increase to attract investors, the capital will go to public debt – and to more productive uses, such as corporate debt that increases investment.
“The crisis scenario is a massive sell-off of low-yielding bonds all at once. That’s what the global financial crisis would look like,” said Marc Goldwein, senior vice president for policy at the U.S. Securities and Exchange Commission. the Responsible Federal Budget, a D.C.-based think tank. “But I think that’s unlikely. … The likely scenario is that it’s going to be very expensive for the U.S. government and very expensive for the the US economy.”