Tremors in Treasury bonds worry Wall Street and Washington

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Problems are emerging in the world of US financial links, causing concern among investors and some Washington policy makers.

The U.S. bond market is a mainstay of the global financial system, but there are signs that the pool of interested investors may be at risk of drying up as the unpredictability of rising US interest rates.

In the meantime, no one is afraid. But the market for U.S. bonds has 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 bought $1 trillion in Treasuries and other financial assets. to make the global financial system work.

Top government officials have acknowledged in recent weeks that activity in the US government bond market could trigger an increase in federal borrowing and financial market turmoil. They are starting to make obstacles.

“We are looking positively at the Treasury market,” Treasury Secretary Janet L. Yellen told the Washington Post on Thursday, stressing that the market is still working well. “Of course, it’s very important that it continues to work well.”

As recession fears rise, Washington begins to consider how to respond

The Treasury Department sells money to pay for government services, effectively borrowing money from investors in return for a promise to pay it back with interest. These bonds are very important for a healthy financial system, because other things, risky assets – stocks and corporate bonds – pay for the value of Treasurys.

But as central banks like the Federal Reserve engage in one of the biggest interest rate hike campaigns in decades, demand for U.S. government bonds has fallen in part because many in which the debt carries a lower interest rate than the one offered. today. That can mean a lot of cheap, unaffordable debt that has few buyers.

There has been no emergency so far, but the market for Treasury bonds is attracting more attention due to concerns that as liquidity dries up around the world, there may sometimes not be enough for buyers of US government debt. provided. With prices falling, the yield on the 10-year Treasury bond has risen from less than 1.5 percent to about 3.8 percent this year. (Bond prices and bond yields go in other directions.)

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A shortage of buyers could have a devastating effect by pushing up bond prices, some economists and analysts warn. A panic sale of U.S. Treasurys can derail the stock market — prompting investors to seek higher returns, or yields, on their bond purchases. That would mean higher prices for any type of financial instrument placed at those rates. It will also increase the amount of money the government pays to pay its bills.

As the Fed fights inflation, concerns are rising that it is fixing it

“If we have a consumer debt crisis, or a failed Treasury sales cycle, interest rate hikes can quickly increase — and suddenly, the cost of credit card debt, car purchases, and more.” , [and] Buying a home will rise in price, “said Joe Brusuelas, chief economist at management consultancy RSM. “That can lower the standard of living for Americans, and you will find yourself in serious trouble for your economy .”

Experts raised other concerns. New rules introduced after the 2008 financial crisis stopped banks from acting as collateral by requiring them to hold more money to cover potential losses on government securities. In addition, the Federal Reserve and other central banks are selling Treasurys or not reinvesting them, as part of their efforts to stabilize the economy and fight inflation, eliminating one person. buying US bonds.

And recent fears in Britain about its own government debt – which has recently fallen dramatically, leading to the intervention of the Bank of England – have raised concerns that stock market panic could take place a. But many economists underestimate the risk.

Donald Kohn, a former vice chairman of the Federal Reserve, said, “You worry about a sell-off, a situation where some sales come in and because you don’t have enough, you have a sell-off. and sell more, and you’ll get more colors.” The Reserve Bank executive is currently a senior fellow at the Brookings Institution, a think tank based in DC. “I don’t think anyone sees that right now.”

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“But the fact that vendors may not be able to step in and fix things is a concern,” he said.

Analysts at JPMorgan Chase expressed similar concerns in a report this month, citing a lack of “organizational appetite for.”

They added, “This change in demand is surprising because it is so rare.”

Yellen has focused on uncertainty in the US bond market since well before the current fire, working to implement new policies to boost them. These measures include improving data collection; requiring more oversight of Treasury trading platforms; and expanding the number of qualified brokers to allow entrants into the market.

Despite her speech on Thursday emphasizing calm, Yellen appears to be intensifying these efforts amid new signs of change. Bank officials asked market participants about possible government debt repurchase programs, a possible sign the US government is worried. The issue was discussed recently by the Financial Stability Oversight Council, chaired by Yellen, and is expected to come up at its next meeting.

What matters to Yellen, she told Bloomberg News this month, is the possibility of “a loss of sufficient liquidity in the market.”

But he also sees a negative trend: As bond yields rise, more foreign investors enter the market to gain more leverage.

“You ask who’s going to buy Treasurys, and I think part of the answer is that they have a nice yield,” Yellen said Thursday.

Komal Sri-Kumar, president of economic consultancy Sri-Kumar Global Strategies, thinks that higher interest rates will make US debt more profitable for investors, attracting more trades in the market and reduces concerns about water supply.

And in a broader sense, many economists and financial analysts say that concerns about market weakness may be overstated, especially now, according to the health status of the US government – about billions $600 – continues to sell daily.

Historically speaking, warnings about the risks of investors refusing to buy US government debt have not ended. For example, under the Obama administration, Republicans and other deficit hawks said that large deficits will put the risk of financial collapse if bond buyers lose faith in the US government. No such problem appeared.

Sri-Kumar called the warnings “ridiculous.”

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“If I refuse to buy [long-term] chain, what happens then? The bank will give a higher yield, and we will reach a better balance, “Sri-Kumar said. “This is not Argentina or Zimbabwe or Turkey, where the investors said: ‘The interest rate is not enough; going for a walk.’ That’s why I think the consumer service is pointless.”

That view was echoed by a senior Treasury official, who told The Washington Post that American policymakers have confidence in the U.S. bond market in part because many investors around the world are want to buy the chains. There are major consumer countries, among them Japan, but even in that case, it is only 4 percent of the total pool.

But while volatility is in the bond market, volatility is also hitting the financial sector more broadly — suggesting no risk to U.S. bonds despite their high demand, a Treasury official said.

Poor countries may suffer from US efforts to reduce inflation

It’s been a different picture recently in Britain, where most of the country’s long-term government debt has been spent on pension funds. That made British bonds, or gilts, more vulnerable to price swings when pension funds moved to dump the assets as their value fell.

That type of disease is unlikely to appear in the United States, researchers said.

“If you [expect] demand will rise for higher value items, [this] will make the panic foolish or misplaced,” said Bob Hockett, a former Fed official who is now a public policy expert at Cornell University. but there is nothing on the horizon that is a serious competitor to the US dollar.”

Still, rising bond yields can hurt the US economy and government without causing disaster. If bond yields rise to attract investors, capital will flow into government debt — and through other productive uses, such as corporate debt that drives investment. .

“The problem is the immediate sale of the bonds. That will be the scene of the global economic crisis, “Marc Goldwein, senior vice president for policy at the Committee on the Federal Budget, a think tank from DC. But I don’t think that’s possible. … It’s probably going to cost the U.S. government and the U.S. economy.”

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