Buying and selling in the world's biggest bond market is supposed to be easy. However, for most of this year, bond portfolio managers says it has been anything but straightforward.
The US Treasury bond market suffered a huge scare at the start of the coronavirus pandemic when fears about a collapse in the global economy led to a sudden slump in prices and liquidity.
Now as the Federal Reserve battles to rein in inflation, a recession looms and most asset prices have faced a dramatic sell-off, the world’s most important bond market is creaking once again.
Liquidity in the market — one crucial measure of how well it is functioning — is at its worst levels since March 2020 after a dramatic decline in the past year. Market depth, a measure of liquidity which refers to the ability of a trader to buy or sell Treasuries without moving prices, is also at its worst level since March 2020.
While investors are not concerned about an exact replay of the UK crisis, in which pension funds placed leveraged bets on the direction of bonds at a large scale, many fear that an unforeseen wave of selling could quickly overwhelm the US bond market’s shaky infrastructure.
Ultimately, a large-scale Treasury market crisis would likely lead to an intervention by the Fed — just as in the UK, the Bank of England temporarily halted its quantitative tightening programme to backstop the market.
However, a market in which the Fed is regularly forced to intervene is also not one that communicates the kind of stability and security that investors around the world depend on.
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