Why the bond market might keep America’s next president awake at night

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The stock of Treasuries has quadrupled since 2007, raising the risk of a snarl-up in the bond market's plumbing

market has long been able to strike fear into the hearts of the powerful. Frustrated by worries in the 1990s that bond yields would spike if Bill Clinton, then America’s president, pushed through economic stimulus, James Carville, his adviser, joked that he wanted to be reincarnated as the bond market, because “you can intimidate everybody”.

On October 14th Randal Quarles, the Federal Reserve’s regulatory boss, said that the Treasury market’s expansion over the past decade “may have outpaced the ability of the private-market infrastructure to kind of support stress of any sort”. His comments were prompted by the fear of a repeat of the extreme stresses in March and April, as the economic threat of covid-19 became clear. Usually a haven, the Treasury market convulsed.

As the demands upon them grew, though, the pipes through which Treasury trades are intermediated began to shrink. Trading depends on so-called “primary dealers”—a handful of firms allowed to buy bonds directly from the American government. Access to issuance lets these dealers—largely housed inside big banks, like JPMorgan Chase or Goldman Sachs—also dominate the intermediation of most Treasury trading.

Such strains may become more apparent over time. Whatever the scale of stimulus enacted next year, the bond market will swell further. The Congressional Budget Office expects federal debt to be worth over $120trn in 2050, or 195% of. The result is that “in ten or 15 years only half as big a shock as covid-19...would cause the same degree of Treasury-market dysfunction,” noted Darrell Duffie of Stanford University, at the Fed’s conference.

 

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Right on cue. The deficit hawks are back.

Stimulus? Is that a non-zero number? Stimulus for Americans $0. For failing corporations $∞.

Yes!! More debt more debt!!

Ji,

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