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Treasury market is ‘fragile’ at risk of being ‘forced to sell on a large scale’ or unexpectedly crashing, says BofA


The world’s deepest and most liquid fixed-income market is in big trouble.

For months, traders, academics, and other analysts have worried that the $23.7 trillion Treasury market could be the source of money. financial crisis. Then last week, the US Treasury Secretary Janet Yellen acknowledged concerns about the potential disruption of government debt trading and expressed concern about “appropriate illiquidity in the market.” Now, strategists at BofA Securities have identified a list of reasons why U.S. Treasuries are at risk of “large-scale or unexpected external force-selling” at a time when the bond market needs them. a trusted group. big buyer.

“We believe the UST market is fragile and there is a potential for a shock to operational challenges,” said BofA strategists Mark Cabana, Ralph Axel and Adarsh ​​Sinha. “The UST incident is not our base case, but it is a building risk.”

In a note released Thursday, they said “we’re not sure where this forced sale might be coming from,” though they have some ideas. Analysts said they recognize the risks that can arise from mutual fund inflows and outflows, the dismantling of positions held by hedge funds and the removal of risk parity strategies is applied to help investors diversify risk across assets.

Additionally, events that may surprise bond investors include year-end funding stress; a Democratic sweep of midterm elections, which is not currently a consensus expectation; and even a shift in the Bank of Japan’s yield-curve policy, according to BofA strategists.

Meanwhile, the BOJ’s yield curve control policy, Aim to keep profit 10 years the country’s government bonds at around zero are being pushed up break point as interest rates and yields rise around the world. Therefore, some people expect BOJ adjusts its policyintroduced in 2016 and seen as increasingly outstripping other central banks.

Read: Here’s what’s at stake for markets as the Bank of Japan sticks to its dovish path

Right now, investors are grappling with a cauldron of risks: continued U.S. and global inflation, accompanied by continued interest rate hikes by the Federal Reserve and other central banks, also such as prolonging the uncertainty about the direction of the world economy and financial markets. With US officials concerned about the possibility of a repeat of September’s volatility hitting the UK bond market, Fed and White House officials spent last week asking investors and economists whether a crisis Can a similar crisis happen here? New York Times.

Liquidity in the normally well-functioning equity bond market means that government debt cannot easily and quickly be bought and sold without significantly affecting the underlying price of the bond – and the type of situation That would theoretically be a problem for every other asset class.

Traders are just starting to factor in the larger possibility that the lending rate target could rise above 5% next year, compared with current levels of 3% to 3.25%, which increases the likelihood. The ability to continue selling bonds not long after investors have just finished. Their head is around 4% for interest rates.

As of Thursday, Treasury yields continue to move higher, offering 2
TMUBMUSD02Y,
4,601%
,
ten-
TMUBMUSD10Y,
4.226%

and 30 years interest
TMUBMUSD30Y,
4.224%

further into multi-year highs. Meanwhile, all three major US stock indexes
DJIA,
-0.20%

SPX,
-0.66%

COMP,
-0.20%

lower in afternoon trading.

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