Weekly Comic – Bond market turmoil spooks investors

By Scott Kanowski

Investing.com — Investors in the global bond markets of developed countries are apparently nervous these days.

Sovereign debt yields have risen to their highest levels in years, led by many central banks around the world, which seem determined to continue tightening monetary policy to rein in soaring inflation, even if this can weigh on broader economic growth.

The 10-year US Treasury bond, a crucial benchmark, saw its yield rise comfortably above 4% after starting the year at around 1.5%. Meanwhile, the yield of its 2-year counterpart has risen further, a development that historically suggests a recession looms in the world’s largest economy. Prices generally fall as yields rise.

BlackRock Investment Institute researchers are clearly biting their nails: A study last week gloomily stated that normally safe-haven government bonds may not offer much protection if central banks continue to raise borrowing costs to calm the economy. galloping inflation.

Meanwhile, from Wall Street to Washington DC, concerns over liquidity are putting additional pressure on already struggling US Treasuries – a crucial cog in the engine of the global economy.

A measure of JPMorgan’s market liquidity recently fell to its lowest level since the early days of the pandemic in March 2020. A Bloomberg index shows investors are now having the hardest time closing deals in the Treasury market in about two and a half years.

The Federal Reserve, which has outlined plans to shrink its massive $9 trillion balance sheet, is behind the concerns. The Fed hopes that by canceling these bond purchases — and thereby canceling much of a program partly designed to help prop up banks through the initial economic fallout from the COVID-19 crisis — it can hasten the recovery. price growth.

But the consequences of this decision are still far from certain.

In September, a Bank of America strategist reported that the Fed rapidly withdrawing liquidity from the Treasury market represents “one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007. “.

Even US Treasury Secretary Janet Yellen warned she was “worried” about maintaining adequate liquidity in bond markets. In November, US regulators will debate possible changes in the structure of the Treasury bill market in an attempt to resolve possible systemic problems.

This is for good reason, as Rishi Sunak’s sudden rise to power in the UK showed. His predecessor as prime minister, Liz Truss, was left without her party’s support following the release of a disastrous ‘mini-budget’ filled with unfunded tax cuts that skyrocketed UK government bond yields, known as Gilts.

These swings, along with signs of a slowdown in pension funds, led the Bank of England to shore up UK debt markets through £5bn of temporary debt purchases. Truss’ premiership is now over, but not before the chaos also impacted bond markets in the United States and Europe.

The politicians of the European Central Bank to encounter On Thursday, the Frankfurt-based institution is expected to reveal more details about its rate hike trajectory and, potentially, its own pullback on bond buying.

Earlier this week, eurozone borrowing costs fell on a report that the Fed may begin to ease its pace of policy tightening. Investors are hoping the ECB will follow suit.

But worries linger, echoing a sentiment attributed to American political strategist James Carville: “I used to think that if there was reincarnation, I wanted to come back as president or pope or baseball hitter .400 . But now I want to come back as a bond market. You can intimidate everyone.

It remains to be seen whether the recent bond market turmoil of the last few weeks will prove him right.

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