ANALYSIS | THE NEXT FED CRISIS IS BREWING IN US COFFERS'
0Analysis | The next Fed crisis is brewing in US coffers'
Make no mistake. if the Treasury market captures. the global economy and financial system will have much bigger problems than rising inflation. Instead of selling bonds. the Fed allows 9k billions of dollars in U.S. Treasuries and mortgage securities that they have accumulated on their balance sheets since the 2008 financial crisis are due without replacing them. It is certain that for many years QE has the desired effect of causing inflation. it is unlikely that QT will help curb inflation. breakout in the government bond market. the benchmark for all other markets that determines the cost of money to governments. companies and consumers.A Bloomberg index showing liquidity in the Treasury market now is worse than it was in the early days of the pandemic and the shutdowns. when no one knew what was going to happen. becomes extreme. providing further evidence of a loss of liquidity. What is of greatest concern to the Fed and Treasury is reducing demand at US debt auctions. According to Bloomberg News. a key measure known as the bid to bid ratio in Wednesday's government offering was $32 billion in 10 year bonds. one standard deviation below the average. average of last year. Demand from indirect contractors. often seen as a proxy for foreign demand. is the lowest since March 2021. data compiled by Bloomberg shows. While the Treasury Department is not at risk of an “auction failure.” lower demand means the government is paying more to borrow. All of this is coming as Bloomberg News reports that Treasury's biggest. most powerful buyers from Japanese pensions and life insurance companies to foreign governments and commercial banks. American trade all withdrew simultaneously. “We needed to find a new buyer for Treasuries because of the issues.” said Glen Capelo. who spent more than three decades at the Wall Street bond desks and is now an managing director at Mischler Financial. Central banks and banks in general are exiting the remaining phase. Bloomberg News. The U.S. bond market. which resonates with debt markets around the world. is hardly alone. UK auctions have come to a halt over the past two weeks. prompting a liquidity crisis to erupt across most government debt markets. From the Fed's perspective. perhaps hesitant to adjust QT for fear of being perceived as more interested in bailing out Wall Street fat cats than in taming inflation. But. again. QE and QT have been shown to have more impact on the smooth functioning of the financial system than on the real economy. And it's not like the Fed hasn't tweaked its QT program before to address disruptions in the market's plumbing.'
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