Could liquidity dry up in US Treasuries?

Declining liquidity in US Treasuries – the global 'safe-haven' asset – could have unpredictable consequences.

Russ Koesterich, the chief executive investment officer of BlackRock, the world's largest asset manager, is worried, says Szu Ping in The Daily Telegraph.With interest rates set to begin rising again after years at record lows, Koesterich is concerned that "complacent investors could be left floundering in a world of evaporating liquidity" as ultra-easy monetary policies come to an end.

Hedge fund manager Ray Dalio of Bridgewater Associates has gone further; in a recent note, he warned clients that the Federal Reserve risks "triggering a 1937-style stockmarket crisis when it starts to raise rates". Back then, US stocks slumped 55% as policymakers began to wind down the stimulus measures they had introduced in an attempt to lift the economy out of the great depression.

Perhaps the greatest fear is how tighter policy will affect the US bond market. This is "the biggest and most liquid in the world, and forms the bedrock for the global financial system", says the FT's Robin Wrigglesworth.

Yet it experienced unprecedented volatility last autumn, and Federal Reserve officials have warned that this "could happen again due to the changing nature of the US government debt market".

Fears centre on "regulatory changes that encourage the hoarding of Treasuries and discourage banks from helping to cushion sharp moves in bond markets". The rise of "electronic, high-frequency trading in the US government bond market" is another cause for concern. Declining liquidity in US Treasuries the global 'safe-haven' asset could have unpredictable consequences.

Recommended

US stimulus checks – will you get one?
US Economy

US stimulus checks – will you get one?

To help fight high inflation and financial hardships, some US states have started to send stimulus checks to support residents. Here’s what you need t…
14 Nov 2022
US inflation drops to 7.7%
US Economy

US inflation drops to 7.7%

Costs for rents increased, but the price of cars, clothes and medical care helped slow the rate of inflation in the US
11 Nov 2022
Federal Reserve hikes interest rates to 4%
US Economy

Federal Reserve hikes interest rates to 4%

The Federal Reserve continues its battle with inflation with another bumper interest rate hike.
3 Nov 2022
What are Gilts and why should you care about them?
Government bonds

What are Gilts and why should you care about them?

Gilts have been in the news a lot recently, but not everyone understands why these assets are so vital to the UK economy.
24 Oct 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments
State pensions

State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments

LCP launches Mothers Missing Millions campaign amid DWP state pension errors.
3 Dec 2022