RATES ARE RISING. WHAT WILL HAPPEN IF THERE IS A SUDDEN COLLAPSE IN THE TREASURY BOND MARKET?

The US Treasury bond market worth approximately $24 trillion is considered the most important in the world.

The smooth operation of the US Treasury bond market directly affects both America’s ability to manage its government and the health of the financial system as a whole, which depends on the opinion of traders that US debt is a safe bet.
So, what happens if there is a sudden collapse in the Treasury bond market?
This is a question that both US officials and Wall Street banks have been asking more and more since the United Kingdom experienced a crisis in its own government bond market. The Bank of England was forced to make an emergency intervention.
Fears are brewing that the standoff between Republicans and President Joe Biden over the debt ceiling in 2023 could be a similar moment of reckoning.

“America should not be held hostage by members of Congress who think it’s alright to compromise the credit rating of the United States and to threaten default on US Treasuries, which are the bedrock of global financial markets,” Treasury Secretary Janet Yellen told CNN on Thursday.
U.S. debt trading has been more tense than usual as uncertainty keeps investors on the sidelines and foreign central banks and governments look for ways to support their struggling currencies.

“Most recognize there is an underlying fragility in the market today,” said Mark Cabana, head of US rates strategy at Bank of America. “Fragile things can break easily.”
The yield on benchmark 10-year Treasury bonds, which move at opposite prices, has risen sharply, exceeding 4.2% this month from 2.6% in early August and 1.5% at the beginning of the year.
These significant changes in the typically gradual world of government bond trading reflect declining demand.
While Treasury bonds usually serve as a safe haven for investments in times of uncertainty, the lack of clarity about how long the Federal Reserve will continue to raise interest rates — and how long high inflation will persist — makes traditional buyers more hesitant.
Yellen said her agency is closely monitoring the situation, acknowledging that the trades “reflect a lot of uncertainty about the economic outlook,” although “volumes are steady and investors can make deals.”

Treasury bonds are not immune to turbulence, for example, in March 2020, concerns about the coronavirus pandemic caused rare disruptions. The Federal Reserve was able to restore confidence, but only after it announced that it would buy government bonds en masse.
Nowadays, the market looks tense, but under control. But Brad Setser, a senior fellow at the Council on Foreign Relations who studies financial vulnerability, draws attention to the extent to which central banks or governments in countries like Japan offload treasury bonds.
As the US dollar began a dizzying rally, pushing down other currencies, officials intervened to try to limit the damage. Japan, for example, has tried to support the falling yen, which recently fell to its lowest level against the US dollar since 1990.Although official data is often late, Setser, a former Biden administration adviser, said there is “growing evidence that some central banks are starting to become modest sellers of Treasuries.”

The Federal Reserve also began reducing its holdings in the pandemic era, a process known as quantitative tightening. An increase in the supply of bonds could further boost yields if demand remains subdued.
“The amount of Treasuries that the market needs to absorb is obviously going to increase with the Fed’s quantitative tightening, and uncertainty about the path for interest rates is creating more intrinsic volatility in the market,” Setser said.
Signs that the modern Treasury bond market is more sensitive than usual, as evidenced by recent events in the United Kingdom. When an investor revolt over plans unveiled by former Prime Minister Liz Truss in September to cut taxes while increasing borrowing caused chaos in the public debt market.
The US pension industry is structured differently from the United Kingdom’s, and many of the factors that triggered the fallout were specific to Britain.
Nevertheless, this episode attracted the attention of US government debt traders and politicians. One concern is that if Republicans take control of one or both houses of Congress after the midterm elections this fall, they will use the debt limit, which will probably need to be raised in 2023, as a negotiating tactic with Biden.
Yellen told CNN that it’s “utterly essential” that the debt ceiling is raised when necessary.
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Мain sources: CNN Business  https://edition.cnn.com/2022/10/29/investing/us-treasuries-risk/index.html