Tuesday, September 16, 2025
  • Login
Euro Times
No Result
View All Result
  • Home
  • Finance
  • Business
  • World
  • Politics
  • Markets
  • Stock Market
  • Cryptocurrency
  • Investing
  • Health
  • Technology
  • Home
  • Finance
  • Business
  • World
  • Politics
  • Markets
  • Stock Market
  • Cryptocurrency
  • Investing
  • Health
  • Technology
Euro Times
No Result
View All Result

The world’s most important financial market is not fit for purpose

by Euro Times
October 9, 2022
in Finance
Reading Time: 4 mins read
A A
0
Home Finance
Share on FacebookShare on Twitter


Everyone wants to trade Treasuries. Big banks hold them for liquidity management, pension funds own them for long-term yields, hedge funds use them to bet on the economy, individuals’ savings are stored in them and central banks use them to manage foreign-exchange reserves. The market for Treasuries, most of the time, is deep and liquid. Some $640bn of government bonds change hands each day, at prices that become the benchmark risk-free rate by which all financial instruments are valued and lending rates set.

Listen to this story.
Enjoy more audio and podcasts on iOS or Android.

Your browser does not support the <audio> element.

Save time by listening to our audio articles as you multitask

So why do they sometimes not change hands? Several times in the recent past the market has broken down. In 2014 a “flash rally” led to wild swings in prices, for no clear reason. In 2019 rates spiked in the “repo” market, in which Treasuries can be swapped for cash overnight. In March 2020 extreme illiquidity led yields to spike, even though in times of panic they usually fall as investors rush to safe assets. Now issues are cropping up again: measures of volatility have jumped to levels last seen in 2020 and bid-ask spreads are widening.

The problem stems from the fact that the Treasury market has doubled in size over the past decade, even as its infrastructure has shrunk. Trading is carried out by primary dealers, designated institutions which are mostly big banks—and regulatory requirements now constrain them. The leverage ratio, which limits the value of assets banks can hold relative to their capital, does not care whether the asset is super-safe Treasuries or subprime mortgage debt. Thus when a client calls asking to sell a bond, banks must find a client who wants to buy it, rather than holding it as inventory for when another client calls. In times of stress, this system gets overwhelmed.

The fixes fall into three buckets: let the banks trade more bonds with investors, let investors trade more bonds with each other, or let investors trade or swap more bonds with the Federal Reserve.

Start with letting the banks do more. The solution would be to exempt Treasuries and other safe assets, like bank reserves, from inclusion in leverage ratios. The Fed and other bank regulators did this for a year from March 2020 to help ease market chaos. The logic behind the move was sound enough. Treasuries are not risky assets, likely to default, and so they do not require much capital to be held against them. Still, the leverage ratio is appealing because it is simple to administer and cannot be gamed. And with Democratic bank regulators in charge, who do not want to appear to be undoing financial regulation, the idea is a non-starter.

How about letting investors deal more with one another? Portfolio managers at pimco, a large bond investment firm, have proposed that investors should trade on a platform where asset managers, dealers and non-bank liquidity providers can trade on a “level playing field, with equal access to information”, akin to how stocks are traded. This could be good, if it is actually possible. Matching buyers and sellers of Treasuries is harder than matching buyers and sellers of stocks. All shares in Microsoft are the same; there are dozens of Treasuries that have roughly five years to maturity.

A final fix would be to let investors do more with the Fed. Last year the central bank created a standing repo facility, which allows a Treasury to be swapped overnight for cash. But the facility is only for primary dealers, which do not always pass on the liquidity. Opening it to more participants would address this problem. It would also expose the Fed to a range of riskier counterparties—but that could be mitigated by requiring firms to swap a greater value in Treasuries than the central bank gives out in cash.

The problem is not a shortage of plausible reforms. It is that none of them have been implemented. The heady bull market has collided with the reality of high inflation and much higher interest rates. Financial markets have already entered a new phase in which volatility, stress and fear have returned. Any grand plans to overhaul the Treasury market cannot be implemented on the fly, in the midst of a burgeoning crisis.

If the Treasury market seizes up again—as the market for British government bonds did after ministers announced a package of unfunded tax cuts on September 23rd—the task of fixing it will fall on the Fed and its bond-buying schemes. Relaunching asset purchases at the same time as raising rates to combat inflation would be very uncomfortable. Since regulators failed to fix the Treasury market when they had the chance, they may end up with little choice.■

Read more from Buttonwood, our columnist on financial markets:
Investment banks are sharpening the axe (Sep 29th)
How to rebrand stockmarket indices (Sep 22nd)
Why investors should forget about delayed gratification (Sep 15th)

For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.



Source link

Tags: financialFitImportantMarketpurposeworlds
Previous Post

Thailand mass shooting kills 34 at daycare centre By Reuters

Next Post

Why China’s policymakers are relaxed about a falling yuan

Related Posts

Bessent sees trade deal likely with China before November deadline on reciprocal tariffs

Bessent sees trade deal likely with China before November deadline on reciprocal tariffs

by Jeff Cox
September 16, 2025
0

Treasury Secretary Scott Bessent expressed confidence Tuesday {that a} commerce take care of China is close to.With so-called reciprocal tariffs...

KKR Acquires Japan’s Hoken Minaoshi Hompo Group From Advantage Partners

KKR Acquires Japan’s Hoken Minaoshi Hompo Group From Advantage Partners

by RTTNews
September 16, 2025
0

(RTTNews) - KKR & Co. Inc. (KKR), an funding agency, on Tuesday introduced that it has acquired Hoken Minaoshi Hompo...

China’s Elite Are Disillusioned With America—But Can’t Quit It

China’s Elite Are Disillusioned With America—But Can’t Quit It

by Donavan Lingerfelt, Ma Junjie
September 16, 2025
0

In a shocking shift, China — longtime recipient of US financial and political assist, and one of many largest beneficiaries...

gold loans: Gold loans turn safe haven for low-income borrowers

gold loans: Gold loans turn safe haven for low-income borrowers

by Rozebud Gonsalves
September 16, 2025
0

Mumbai: Decrease-income debtors, who usually depend upon small-ticket loans, are more and more transferring away from microfinance establishments (MFIs) and...

The Scouring of the American Middle Class

The Scouring of the American Middle Class

by Artis Shepherd
September 15, 2025
0

The confrontation between President Donald Trump and Fed Chairman Jerome Powell has been revealed as largely histrionic. Like their predecessors—Richard...

Despite Recent “Pin the Tail on the European Donkey” Moves, Trump Unlikely to Escape Accusation of Losing Ukraine War

Despite Recent “Pin the Tail on the European Donkey” Moves, Trump Unlikely to Escape Accusation of Losing Ukraine War

by Yves Smith
September 15, 2025
0

Yours really should confess to not writing often of late in regards to the Ukraine struggle as a result of...

Next Post
Why China’s policymakers are relaxed about a falling yuan

Why China’s policymakers are relaxed about a falling yuan

The Erosion of the Nuclear Taboo

The Erosion of the Nuclear Taboo

PM Modi thanks Trump for birthday wishes, pledges stronger India-US partnership

PM Modi thanks Trump for birthday wishes, pledges stronger India-US partnership

September 16, 2025
Webtoon shares jump more than 35% on digital comics Disney deal

Webtoon shares jump more than 35% on digital comics Disney deal

September 16, 2025
What TikTok Star Earnings Teach Us About Investing

What TikTok Star Earnings Teach Us About Investing

September 16, 2025
10 Highest Yielding Canadian Stocks Now

10 Highest Yielding Canadian Stocks Now

September 16, 2025
Putin Visits Mulino Training Ground in Nizhny Novgorod for Zapad-2025 Exercises

Putin Visits Mulino Training Ground in Nizhny Novgorod for Zapad-2025 Exercises

September 16, 2025
NATO nation cancels over bn in Israeli arms deals – media — RT World News

NATO nation cancels over $1bn in Israeli arms deals – media — RT World News

September 16, 2025
Euro Times

Get the latest news and follow the coverage of Business & Financial News, Stock Market Updates, Analysis, and more from the trusted sources.

CATEGORIES

  • Business
  • Cryptocurrency
  • Finance
  • Health
  • Investing
  • Markets
  • Politics
  • Stock Market
  • Technology
  • Uncategorized
  • World

LATEST UPDATES

PM Modi thanks Trump for birthday wishes, pledges stronger India-US partnership

Webtoon shares jump more than 35% on digital comics Disney deal

  • Disclaimer
  • Privacy Policy
  • DMCA
  • Cookie Privacy Policy
  • Terms and Conditions
  • Contact us

Copyright © 2022 - Euro Times.
Euro Times is not responsible for the content of external sites.

No Result
View All Result
  • Home
  • Finance
  • Business
  • World
  • Politics
  • Markets
  • Stock Market
  • Cryptocurrency
  • Investing
  • Health
  • Technology

Copyright © 2022 - Euro Times.
Euro Times is not responsible for the content of external sites.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In