Tremors in Treasury bonds worry Wall Street and Washington

Trouble is brewing in the world of U.S. Treasury bonds, prompting concern among investors and some Washington policymakers. U.S. Treasury bonds are a key pillar of the global financial system, but there are signs that the pool of interested buyers could be in danger of drying up as an unintended consequence of rising U.S. interest rates. For now, no one is panicking. But the market for U.S. Treasury bonds has lately displayed a level of volatility not seen since the beginning of the pandemic-related crisis in 2020, when the Federal Reserve cut interest rates to zero and went on to buy $1 trillion of treasuries and other financial assets to keep the global financial system functioning. Top government officials have in recent weeks acknowledged that dysfunction in U.S. government bond markets risks triggering a spike in the federal government’s borrowing costs and a wider upheaval in financial markets. They are beginning to take preventive steps. “We have been looking very carefully at the Treasury market,” Treasury Secretary Janet L. Yellen told The Washington Post on Thursday, stressing that the market has continued to function normally. “It’s, of course, critical that it continue to function well.” As recession fears rise, Washington begins to weigh how to respond The Treasury Department auctions bonds to pay for government operations, effectively borrowing money from investors in return for a guarantee of repayment with interest. These bonds are crucial for a healthy financial system, because other, riskier assets — stocks and corporate bonds — are priced in relation to the cost of Treasurys. But as central banks such as the Federal Reserve engage in one of the biggest interest-rate-hike campaigns in decades, demand for U.S. government bonds already in circulation has fallen in part because most of that debt carries lower interest rates than the bonds being issued today. That could mean a glut of cheap, low-yielding debt with few buyers. There’s been no emergency thus far, but the market for Treasury bonds is drawing increased attention out of concern that as liquidity dries up across the globe, there may at some point not be enough buyers of debt issued by the U.S. government. With prices falling, yields on 10-year Treasury bonds have already risen from less than 1.5 percent to roughly 3.8 percent this year. (Bond prices and bond yields move in opposite directions.) A dearth of buyers could cause a ripple effect by forcing down the price of bonds, some economists and analysts warn. A panicked sell-off of U.S. Treasurys could wreak havoc on markets — giving investors leverage to demand higher returns, or yield, on their bond purchases. That would mean higher prices for all kinds of financial instruments pegged to those rates. It would also drive up the cost to the government of financing its debt. https://www.washingtonpost.com/us-policy/2022/10/30/tremors-treasury-bonds-worry-wall-street-washington/