Treasury Market Risks ‘Vicious Liquidity Feedback Loop’
"For risk-free assets to be so risky is bound to be problematic," SocGen's Andrew Lapthorne said Monday, while gently noting that even after 2022's simultaneous selloff, global bond and equity market cap still sits around $17 trillion above a simple trendline.
The idea of bonds as a source of portfolio volatility -- the sponsor of an adverse event, rather than a buffer during periods of turmoil -- haunted market participants for years. As yields trekked ever lower, bonds' capacity to offset los
Too many unknowns-
Putin might be defeated in Ukraine and then Russia,
which would result in a reversal of sanctions.
Republicans might do very well in the mid terms.
Drilling/fracking in US might get more US citizen support.
The Federal government might increase the deficit
spending beyond the current annual rate of $1-$1.5T.
The Fed might be less hawkish than expected- as this post mentioned.
US corporations might expand supply chains beyond
China more rapidly than currently expected. Long term, this will be very healthy.
Millennials who lost a lot of money in cryptos and non-
profitable tech stocks might become more traditional
investors, and actually invest in companies that make a profit.
And so on.
I do not see how anyone can be “certain” about what the
US economy, the global economy or the US stock market will look like in the next 6-12 months.
The market is always uncertain. What this piece is really about is the potential disaster of a UST bond market that is not functional. The Fed would have to step in. That is why I always sound the alarm here about QT. Because of increased regulation of banks, there has ceased to be a buffer from dealers in the UST market since the Volker rule was implemented. Or to put it another way there is no longer a dealer buffer providing liquidity. So, the market is dependent now on the Fed, foreign central banks and foreign private entities for a greater share of liquidiity. The Fed thinks conditions are looser in the UST bond market than in fact they are. Markets are no longer resilient or liquid on their own. We have a fragile financial system. My bet is the Fed has 100 bps more in increases left at most. If they do substantial QT it is less than that before a major accident becomes likely. Crypto, meme stocks, spacs are just the warm up…..if they keep going rapidly they are almost certain to cause a problem.
https://www.bloomberg.com/professional/blog/treasury-issuance-to-rise-on-runoff-that-could-replace-hikes/
Above link seems to suggest that ramp in gross issuance might be in 1H 2023, with issuance declining for most of 2022? I’m assuming Treasury will try to ease Fed’s way.