(Bloomberg) — The latest bout of global financial volatility has heightened concerns about regulators’ continuing failure to resolve liquidity problems with US Treasuries — the debt that serves as a benchmark for the world.
Most Read from Bloomberg
It’s getting harder and harder to buy and sell Treasuries in large quantities without those trades moving the market. Market depth, as the measure is known, last Thursday hit the worst level since the throes of the Covid-19 crisis in the spring of 2020, when the Federal Reserve was forced into massive intervention.
With rising risks of a global recession, escalating geopolitical tensions and the potential for further defaults by developing nations — not to mention ructions in a developed economy such as the UK — investors may not be able to rely on Treasuries as the reliable haven they once were.
“We have seen an appreciable and troubling deterioration in Treasury market liquidity,” said Krishna Guha, head of central bank strategy at Evercore ISI. Regulators “really haven’t delivered yet any substantial reforms,” he said. “What we are seeing at the moment is a reminder that the work is really important.”
When the Treasuries market broke down amid a panicked rush into dollar cash in March 2020, the Fed swooped in as buyer of last resort. And while it now has a backstop facility allowing the exchange of Treasuries for cash, volatility, if extreme enough, could still force the Fed into action, observers said.
That’s particularly awkward now, when policymakers are not only raising interest rates but actively shrinking the portfolio of Treasuries. So-called quantitative tightening is supposed to be playing an “important role” in tightening monetary policy, as part of the central bank’s battle to contain inflation.
“The biggest nightmare for the Fed now is that they have to step in and buy debt,” said Priya Misra, global head of rates strategy at TD Securities. “If the Fed has to step in — when it’s in conflict to monetary policy — it really puts them in a bind,” she said. “That’s why I think regulators need to fix the market structure.”
The Treasury Department is working on an initiative to enhance transparency in the trading of US government debt, seen as one step that could encourage dealers and investors to boost volumes. News on that front may come at a Nov. 16 annual market-structure conference.
But the outlook for bigger reforms, such as the Fed relaxing banks’ capital requirements connecting to how much Treasuries they hold, remains unclear. An independent panel this past summer criticized regulators for the slow pace of their efforts.
“I do think the official sector is moving, but there’s a lot more to do,” said Darrell Duffie, a Stanford University finance professor who served on that panel.
Duffie, who is currently seconded to the Federal Reserve Bank of New York, added, “The Treasury market is the most important securities market in the world and it’s the lifeblood of our national economic security. You can’t just say ‘we hope it will get better’ you have to move to make it better.”
For now, things are not better, with what would once be viewed as outsized daily yield swings becoming commonplace. A Bloomberg index of liquidity levels, which measures on average how far yields are away from where fair-value models say they should be, shows conditions have deteriorated.
“Market liquidity is definitely lower,” New York Fed President John Williams acknowledged this week. But he added, “It’s still functioning.”
Fundamental to the structural challenge is the surge in supply — Treasury debt outstanding has climbed by $7 trillion since the end of 2019. And big financial institutions haven’t been as willing to serve as market-makers, burdened by the so-called supplementary leverage ratio, or SLR, which requires that capital be put against such activity (as well as reserve holdings).
Fed Governor Michelle Bowman encouraged some observers with remarks this week signaling openness to adjusting the SLR. But Bowman’s not in the key role overseeing such a move, which would fall to Michael Barr, the newly installed vice chair for supervision.
Josh Younger, JPMorgan Chase & Co.’s global head of asset liability management research and strategy, agrees with Williams that for now the system is “functioning.”
“But for Treasuries to serve the purpose for which they have been anointed — which is a cash substitute — the intermediation mechanism” needs to be more robust, Younger said. “It’s still important to fix the system” so that it can handle a March 2020 type of strain, he said.
Among the other moves regulators are looking at is enhancing the role of central clearing of Treasuries, for which the Securities and Exchange Commission has put forth a proposal. For its part, Pacific Investment Management Co. wants investors to be able to trade directly with each other.
“The individual initiatives being discussed may not be silver bullets on their own, but collectively they would contribute to a more efficient, resilient and liquid market,” said Stephen Berger, global head of government and regulatory policy at Citadel Securities. “Delaying unnecessarily the implementation of the market enhancements being discussed perpetuates the risk that the Fed feels compelled to intervene during a future market dislocation.”
Most Read from Bloomberg Businessweek
©2022 Bloomberg L.P.
The Daily Beast
Photo Illustration by Erin O’Flynn/The Daily Beast/GettyAfter a woman revealed that Republican senatorial candidate Herschel Walker had urged her to have an abortion, Walker adamantly denied the story and claimed he had no idea who this woman could be.But there’s a good reason the woman finds that defense highly doubtful: She’s the mother of one of his children.When the woman first told The Daily Beast her story, we agreed not to reveal certain details about her identity over her concerns for sa
The Democrat-led border city of El Paso, Texas, has sent more migrants on buses to New York City and Chicago than a campaign by Texas’ Republican governor, a twist in an ongoing partisan battle over U.S. border security. El Paso, which sits across the border from Juarez, Mexico, has bused roughly 7,000 migrants to New York City since late August and sent more than 1,800 to Chicago, a city-run effort that far exceeds the more ad-hoc transportation of the past. The city’s busing effort has received less attention than a separate statewide campaign by Texas Governor Greg Abbott, who is seeking a third term in Nov. 8 midterm elections.
(Bloomberg) — Cathie Wood’s latest dip-buying binge appears to be largely focused on smaller stocks, cementing her firm’s already hefty shareholdings in such companies.Most Read from BloombergTrump Says US Agency Packed Top-Secret Documents. These Emails Suggest Otherwise.Musk Revives $44 Billion Twitter Bid, Aiming to Avoid TrialMar-a-Lago Documents Included Pardons, Emails, Legal BillsSecretive Chip Startup May Help Huawei Circumvent US SanctionsStocks Take Breather After Furious Rally From L
Yahoo Finance Video
Blanke Schein Wealth Management CIO Robert Schein and FWDBONDS Chief Economist Chris Rupkey join Yahoo Finance Live to weigh in on what the next moves from the Fed might be as fears of a recession continue growing.
Oil prices have been all over the place this year. WTI, the primary U.S. oil price benchmark, started 2022 at around $75 a barrel before rocketing over $120 a barrel following Russia’s invasion of Ukraine. The move could keep a floor under crude prices and potentially push them higher depending on demand and other supplies.
Shares of electric vehicle (EV) stocks Nio (NYSE: NIO), Lucid Group (NASDAQ: LCID), and Lordstown Motors (NASDAQ: RIDE) fell on Wednesday, down 5.1%, 3.6%, and 4.9%, respectively, as of 2:17 p.m. EDT. After a huge amount of selling in September, stocks were beaten down, but the first two days in October saw some potentially good news on inflation. With traders trying to sniff out the first signs of inflation breaking, that was a good sign.
Shares of AMC Entertainment Holdings (NYSE: AMC) are tumbling 9.1% at 11:06 a.m. ET on Wednesday after defunct gold and silver miner Hycroft Mining (NASDAQ: HYMC) reported it received a delisting notice from the Nasdaq Stock Market. AMC surprised investors earlier this year by taking a 22% stake in Hycroft in exchange for a $28 million cash infusion. Metals investor Eric Sprott invested a similar amount into Hycroft in return for the same percentage ownership position.
Make it two days in a row of big gains for Biohaven Ltd. (NYSE: BHVN). The momentum is primarily due to the company’s new beginning after being spun off from Biohaven Pharmaceutical. Pfizer (NYSE: PFE) closed on its acquisition of Biohaven Pharmaceutical on Monday, with Biohaven Ltd. created as a spin-off before the transaction finalized.
Two of the most prominent mortgage real estate investment trusts (REITs), Annaly Capital Management (NYSE: NLY) and AGNC Investment (NASDAQ: AGNC), were down sharply during trading on Wednesday. Annaly Capital was down as much as 9% on the day at around noon ET, while AGNC fell as far as 9.7% on the day at around the same time. As both Annaly Capital and AGNC Investment are mortgage REITs, they were each negatively affected by the latest news from the housing industry.