Weekly Comic – Bond Market Turmoil Spooks Investors by


By Scott Kanowsky — The developed world’s bond market investors are on edge.

Many central banks around world have encouraged sovereign debt yields to soar to their highest levels in many years. They are determined to continue tightening monetary policies to stop rising inflation even though it may impact wider economic growth.

After starting the year at 1.5% it has now reached 4%. The U.S. Treasury Bond, a key benchmark, has seen its yield rise to 4% comfortably. The yield on its counterpart has risen further, a sign that a recession is in the near future. As yields rise, prices tend to fall.

BlackRock Investment Institute researchers are clearly biting their nails: A study last week found that normally safe-haven bonds may not offer much protection if central banks keep increasing borrowing costs to cool down red hot inflation.

From Wall Street to Washington D.C. worries about liquidity are adding additional stress to already stressed U.S. Treasuries, a critical cog in the global economy’s engine.

JPMorgan’s market liquidity recently fell to its lowest level in over a decade since March 2020, when the pandemic began. Bloomberg’s index shows that investors are finding it increasingly difficult to get deals in the Treasury market over the past two and a-half years.

The Federal Reserve is driving these jitters, as it has plans to reduce its $9 trillion balance sheet. The Fed hopes that it can pull off price growth by reducing its bond buying, which is partly intended to support banks during the initial economic downturn from the COVID-19 crises.

However, the consequences of this decision remain uncertain.

A Bank of America strategist pointed out that the Fed’s rapid withdrawal of liquidity from the Treasury market is “one of the most serious threats to global financial stability right now, potentially worse than 2004-2007 housing bubble.”

Janet Yellen, U.S. Treasury Secretary, has stated that she is concerned about maintaining sufficient liquidity in the bond markets. To address systemic issues, U.S. regulators are expected to discuss possible changes to the Treasuries Market structure in November.

This is a good thing, as Rishi sunak’s sudden rise in power in the United Kingdom shows. Liz Truss, his predecessor as prime minister was left without support by her party after she released a disastrous mini-Budget that contained unfunded tax cuts. This led to the British government bond yields, also known as Gilts soaring.

These gyrations, along with signs of sputtering in pension funds, led the Bank of England to shore up U.K. debt markets through £5 billion in temporary debt purchases. Truss’s premiership ended, but not before chaos also impacted bond market in the U.S.A.

Thursday’s meeting of policymakers at the European Central Bank will be a great opportunity for the institution based in Frankfurt to share more information about its rate hike path as well as its potential pullback on bond purchases.

This week, Eurozone borrowing costs fell on news that the Fed might slow down its pace of policy tightening. Investors are hopeful that the ECB will follow their lead.

However, the worries continue, echoing a sentiment attributed American political strategist James Carville: “I used think that if there were reincarnation I would come back as the president, pope, or a.400 MLB hitter. But now, I want to return as the bond market. You can intimidate anyone.”

It remains to see if the recent bond market turmoil over the past few weeks could prove him right.

News Source and Credit

Stocksak Editorial

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