Is the world’s most important asset market broken?
Debt-ceiling brinkmanship has pushed America towards a technical default. Rising interest rates and incontinent spending have seen debt balloon: the country’s total stock of it now amounts to $26.6trn (96% of gdp), up from $12.2trn (71% gdp) in 2013. Servicing costs come to a fifth of government spending.
As the Federal Reserve reduces its holdings of Treasuries under quantitative tightening and issuance grows, investors must swallow ever greater quantities of the bonds. All this is straining a market that has malfunctioned frighteningly in the past. American government bonds are the bedrock of global finance: their yields are the “risk-free" rates upon which all asset pricing is based.
Yet such yields have become extremely volatile, and measures of market liquidity look thin. Against this backdrop, regulators worry about the increasing activity in the Treasury market carried out by leveraged hedge funds, rather than less risky players, such as foreign central banks. A “flash crash" in 2014 and a spike in rates in the “repo" market, where Treasuries can be swapped for cash, in 2019, first raised alarms.
The Treasury market was then overwhelmed by fire sales in 2020, as long-term holders dashed for cash, before the Fed stepped in. In November a cyberattack on ICBC, a Chinese bank, disrupted settlement in Treasuries for days. Regulators and politicians want to find a way to minimise the potential for further mishaps.
New facilities for repo markets, through which the Fed can transact directly with the private sector, were put in place in 2021. Weekly reports for market participants on secondary trading have been replaced with more detailed daily updates, and the Treasury is mulling releasing more data to the public. But
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