If there is one financial market that could put in doubt the stability of the entire global financial system it is the $23 trillion US Treasury market. Source: Fed Financial Stability Report The housing market may be the biggest single macroeconomic force. US residential real estate alone is worth $53 trillion. But it is illiquid. US equities are valued at $46 trillion. They can be easily bought and sold, but no two equities are alike. You have to pick and choose. The $23 trillion market for US government debt offers a relatively smooth spectrum of homogenous assets that differ only in terms of their duration, ranging from a few weeks to 30 years. They trade on a curve defined in terms of maturity. They are safe assets with no serious default risk offering an extremely liquid market, which provides the ideal platform for financial engineering supercharged with algorithmic high frequency trading. As the largest pool of fixed-income, safe assets, the Treasury market registers vibrations from every piece of economic and policy news in a matter of millisecond. Every day hundreds of billions of Treasuries change hands in hundreds of thousands of trades.
I had to go to that "great quote repository in the sky", google books, to fish out something Harold James has repeated Many many times in his writings on the history of crashes and institutions in market based finance:
"The vulnerability of the world was displayed very abruptly with the outbreak of a financial crisis. The panic of October 1907 showed the fast-growing industrial powers the desirability of mobilizing financial power. The crisis unambiguously originated in the United States, where it had been preceded by financial stress in late 1906 and a stock market collapse in March 1907. At first the October panic affected the new trust companies, but the New York banks were forced to restrict convertibility of deposits into currency. The demand for cash produced an interest rate surge that drew in gold imports but also pushed spikes in interest rates elsewhere, causing great bank strains in Egypt, Italy, and Sweden, but also in Germany.
Only one country seemed quite immune to the panic, even though its market was the central transmission mechanism of price information and interest rate behavior. British observers congratulated themselves on their superiority in a world that was increasingly “cosmopolitan” as a result of the “marvellous developments of traffic and telegraphy,” as the Economist (1907) put it. “We have no reason to be ashamed. The collapse of the American system has put our supremacy into relief. … London is sensitive but safe.”
LONDON IS SENSITIVE BUT SAFE! (sounds like Gerard Butler Movie.."London has fallen"). What James was referring to was the marvel that the London Gilt and "Acceptances" market was FUNCTIONING and robust.
Adam, great post. Would have to comment that Yesha's point about treasury markets have fragmented regulation is not unique. I work in the corporate bond space and the SEC does not oversee all of it. Dealers largely write the rules and run the "auctions" (new issue). The SEC supervises firms that trade corporate bonds. The Fed monitors the major broker-dealers. CFTC oversees derivatives on bonds, same goes for equities.
TL;DR - Treasury markets are no more or less fragmented than other security markets when it comes to regulation
'But if this is the future, it raises the question: are we on a ratchet in which macroeconomic shocks and weak market structure force central banks repeatedly to intervene?'
Stuck In Hell: Fed Creating A Cycle Of Crises It Then ‘Rescues’ Us From | Nomi Prins
"The risk is not that Treasuries suddenly become worthless, as a result of US government default or hyperinflation." and "There were too many sellers and not enough buyers, so the price of highly rated entirely safe securities suddenly plunged and yields surged."
If there is no risk of default/hyperinflation, I don't understand why the assumption is that prices should not decline and yields increase to a level where there are 'enough buyers'? The system is not breaking, it is just not allowing prices to actually clear.
Prof. Tooze,
The Republicans say that they plan to hold the world’s financial system hostage next year.
Do the markets consider the possibility that the US will purposely default on its bonds?
Bernard Leikind
Tampa FL
I had to go to that "great quote repository in the sky", google books, to fish out something Harold James has repeated Many many times in his writings on the history of crashes and institutions in market based finance:
"The vulnerability of the world was displayed very abruptly with the outbreak of a financial crisis. The panic of October 1907 showed the fast-growing industrial powers the desirability of mobilizing financial power. The crisis unambiguously originated in the United States, where it had been preceded by financial stress in late 1906 and a stock market collapse in March 1907. At first the October panic affected the new trust companies, but the New York banks were forced to restrict convertibility of deposits into currency. The demand for cash produced an interest rate surge that drew in gold imports but also pushed spikes in interest rates elsewhere, causing great bank strains in Egypt, Italy, and Sweden, but also in Germany.
Only one country seemed quite immune to the panic, even though its market was the central transmission mechanism of price information and interest rate behavior. British observers congratulated themselves on their superiority in a world that was increasingly “cosmopolitan” as a result of the “marvellous developments of traffic and telegraphy,” as the Economist (1907) put it. “We have no reason to be ashamed. The collapse of the American system has put our supremacy into relief. … London is sensitive but safe.”
from:https://www.elibrary.imf.org/display/book/9781513514277/ch002.xml
LONDON IS SENSITIVE BUT SAFE! (sounds like Gerard Butler Movie.."London has fallen"). What James was referring to was the marvel that the London Gilt and "Acceptances" market was FUNCTIONING and robust.
Adam, great post. Would have to comment that Yesha's point about treasury markets have fragmented regulation is not unique. I work in the corporate bond space and the SEC does not oversee all of it. Dealers largely write the rules and run the "auctions" (new issue). The SEC supervises firms that trade corporate bonds. The Fed monitors the major broker-dealers. CFTC oversees derivatives on bonds, same goes for equities.
TL;DR - Treasury markets are no more or less fragmented than other security markets when it comes to regulation
'But if this is the future, it raises the question: are we on a ratchet in which macroeconomic shocks and weak market structure force central banks repeatedly to intervene?'
Stuck In Hell: Fed Creating A Cycle Of Crises It Then ‘Rescues’ Us From | Nomi Prins
https://www.youtube.com/watch?v=TNvzQa7b-KU&t=3230s
"The risk is not that Treasuries suddenly become worthless, as a result of US government default or hyperinflation." and "There were too many sellers and not enough buyers, so the price of highly rated entirely safe securities suddenly plunged and yields surged."
If there is no risk of default/hyperinflation, I don't understand why the assumption is that prices should not decline and yields increase to a level where there are 'enough buyers'? The system is not breaking, it is just not allowing prices to actually clear.