{"id":1709749,"date":"2022-10-25T06:06:06","date_gmt":"2022-10-25T10:06:06","guid":{"rendered":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/?p=1709749"},"modified":"2022-10-25T07:19:26","modified_gmt":"2022-10-25T11:19:26","slug":"the-treasury-market-is-the-feds-next-crisis","status":"publish","type":"post","link":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/the-treasury-market-is-the-feds-next-crisis\/","title":{"rendered":"The Treasury Market Is the Fed\u2019s Next Crisis"},"content":{"rendered":"<aside class=\"mashsb-container mashsb-main mashsb-stretched\"><div class=\"mashsb-box\"><div class=\"mashsb-count mash-medium\" style=\"&quot;\"><div class=\"counts mashsbcount\">16<\/div><span class=\"mashsb-sharetext\">SHARES<\/span><\/div><div class=\"mashsb-buttons\"><a class=\"mashicon-facebook mash-medium mash-nomargin mashsb-noshadow\" href=\"https:\/\/www.facebook.com\/sharer.php?u=https%3A%2F%2Fwww.conservativenewsdaily.net%2Fbreaking-news%2Fthe-treasury-market-is-the-feds-next-crisis%2F\" target=\"_top\" rel=\"nofollow\"><span class=\"icon\"><\/span><span class=\"text\">Facebook<\/span><\/a><a class=\"mashicon-twitter mash-medium mash-nomargin mashsb-noshadow\" href=\"https:\/\/twitter.com\/intent\/tweet?text=&amp;url=https:\/\/www.conservativenewsdaily.net\/breaking-news\/?p=1709749&amp;via=ConservNewsDly\" target=\"_top\" rel=\"nofollow\"><span class=\"icon\"><\/span><span class=\"text\">Twitter<\/span><\/a><a class=\"mashicon-subscribe mash-medium mash-nomargin mashsb-noshadow\" href=\"#\" target=\"_top\" rel=\"nofollow\"><span class=\"icon\"><\/span><span class=\"text\">Subscribe<\/span><\/a><div class=\"onoffswitch2 mash-medium mashsb-noshadow\" style=\"display:none\"><\/div><\/div>\n            <\/div>\n                <div style=\"clear:both\"><\/div><\/aside>\n            <!-- Share buttons by mashshare.net - Version: 4.0.47--><p><em>Commentary<\/em><\/p>\n<p>The Federal Reserve\u2019s next crisis is already brewing. Unlike 2008, where subprime mortgages froze counter-party trading in the credit markets as Lehman Brothers failed, in 2022, it might just be the $27 trillion Treasury market.<\/p>\n<p>When historians review 2022, many will remember it as a year when nothing worked. Such is far different than what people thought would be the case.<\/p>\n<p>Throughout the year, surging interest rates, the Russian invasion of Ukraine, soaring energy costs, inflation running at the highest levels in 40 years, and the extraction of liquidity from stocks and bonds whipsawed markets violently. Since 1980, bonds have been the de facto hedge against risk. However, in 2022, bonds have suffered the worst drawdown in more than 100 years, with a 60\/40 stock and bond portfolio returning a despairing -34.4 percent.<\/p>\n<p>The drawdown in bonds is the most important. The credit market is the \u201clifeblood\u201d of the economy. Today, more than ever, the functioning of the economy requires ever-increasing levels of debt. From corporations issuing debt for stock buybacks to operations to consumers leveraging up to sustain their standard of living. The federal government requires continuing debt issuance to fund spending programs because it requires the entirety of tax revenue to pay for social welfare and interest on the debt.<\/p>\n<figure id=\"attachment_4816958\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/img.theepochtimes.com\/assets\/uploads\/2022\/10\/24\/image001.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"lazy wp-image-4816958\" src=\"https:\/\/www.theepochtimes.com\/assets\/themes\/eet\/images\/white.png\" data-src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image001-600x346-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"369\" \/><figcaption class=\"wp-caption-text\"><noscript><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4816958\" src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image001-600x346-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"369\" \/><\/noscript><\/figcaption><\/a> (Source: Federal Reserve Bank of St. Louis Federal Reserve, Refinitiv; Chart: RealInvestmentAdvice.com)<\/figure>\n<p>For a better perspective, it currently requires more than $70 trillion in debt to sustain the economy. Before 1982, the economy grew faster than the debt.<\/p>\n<figure id=\"attachment_4816959\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/img.theepochtimes.com\/assets\/uploads\/2022\/10\/24\/image002.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"lazy wp-image-4816959\" src=\"https:\/\/www.theepochtimes.com\/assets\/themes\/eet\/images\/white.png\" data-src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image002-600x337-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"360\" \/><figcaption class=\"wp-caption-text\"><noscript><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4816959\" src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image002-600x337-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"360\" \/><\/noscript><\/figcaption><\/a> (Source: Federal Reserve Bank of St. Louis Federal Reserve, Refinitiv; Chart: RealInvestmentAdvice.com)<\/figure>\n<p>Debt issuance is not a problem as long as interest rates remain low enough to sustain consumption and that there is a buyer for the debt.<\/p>\n<h2>A Lack of a Marginal Buyer<\/h2>\n<p>The problem comes when interest rates rise. Higher rates reduce the number of willing borrowers, and debt buyers balk at falling prices. The latter is the most important. When debt buyers evaporate, the ability to issue debt to fund spending becomes increasingly problematic. Such was a recent point made by Treasury Secretary Janet Yellen.<\/p>\n<p>\u201cWe are worried about a loss of adequate liquidity in the [bond] market,\u201d she said.<\/p>\n<p>The problem is that outstanding Treasury debt has expanded by $7 trillion since 2019. However, at the same time, the major financial institutions that act as the primary dealers are unwilling to serve as the net buyers. One of the primary reasons for this is that for the past decade, the banks and brokerages had a willing buyer to which they could offload Treasurys: the Federal Reserve.<\/p>\n<figure id=\"attachment_4816960\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/img.theepochtimes.com\/assets\/uploads\/2022\/10\/24\/image003.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"lazy wp-image-4816960\" src=\"https:\/\/www.theepochtimes.com\/assets\/themes\/eet\/images\/white.png\" data-src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image003-600x348-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"372\" \/><figcaption class=\"wp-caption-text\"><noscript><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4816960\" src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image003-600x348-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"372\" \/><\/noscript><\/figcaption><\/a> (Source: Federal Reserve Bank of St. Louis Federal Reserve, Refinitiv; Chart: RealInvestmentAdvice.com)<\/figure>\n<p>Today, the Federal Reserve is no longer acting as a willing buyer. Consequently, the primary dealers are unwilling to buy because no other party wants the bonds. As a function, the liquidity of the Treasury market continues to evaporate. <a href=\"https:\/\/www.fa-mag.com\/news\/the-fed-s-next-crisis-is-brewing-in-u-s--treasuries-70157.html\">Robert Burgess<\/a>,\u00a0the executive editor of Bloomberg Opinion, summed it up nicely:<\/p>\n<p>\u201cThe word <em>crisis<\/em> is not hyperbole. Liquidity is quickly evaporating. Volatility is soaring. Once unthinkable, even demand at the government\u2019s debt auctions is becoming a concern.\u00a0Conditions are so worrisome that Treasury Secretary Janet Yellen took the unusual step Wednesday of expressing\u00a0concern about a potential breakdown in\u00a0trading, saying after a speech in Washington that her department is \u2018worried about a\u00a0loss of adequate liquidity\u2019 in the $23.7 trillion market for U.S. government securities. Make no mistake: if the Treasury market seizes up, the global economy and financial system will have much bigger problems than elevated inflation.\u201d<\/p>\n<p>Such isn\u2019t the first time this has happened. Each time the Federal Reserve previously hiked rates, tried to stop quantitative easing, or both, a crisis event occurred. Such required an immediate response by the Federal Reserve to provide an accommodative policy.<\/p>\n<figure id=\"attachment_4816961\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/img.theepochtimes.com\/assets\/uploads\/2022\/10\/24\/image004.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"lazy wp-image-4816961\" src=\"https:\/\/www.theepochtimes.com\/assets\/themes\/eet\/images\/white.png\" data-src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image004-600x351-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"375\" \/><figcaption class=\"wp-caption-text\"><noscript><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4816961\" src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image004-600x351-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"375\" \/><\/noscript><\/figcaption><\/a> (Source: Federal Reserve Bank of St. Louis Federal Reserve, Refinitiv; Chart: RealInvestmentAdvice.com)<\/figure>\n<p>\u201cAll this is coming as Bloomberg News reports that the biggest, most powerful buyers of Treasurys\u2014from Japanese pensions and life insurers to foreign governments and U.S. commercial banks\u2014are all pulling back\u00a0at the same time. \u2018We need to find a new marginal buyer of Treasuries as central banks and banks overall are exiting stage left,&#8217;\u201d according to Bloomberg.<\/p>\n<h2>It\u2019s Not a Problem Until Something Breaks<\/h2>\n<p>As discussed previously, while there are actual warning signs of fragility in the financial markets, they are not enough to force the Federal Reserve to change monetary policy. The <a href=\"https:\/\/www.theepochtimes.com\/t-fed\">Fed<\/a> noted as much in the minutes of its recent meeting.<\/p>\n<p>\u201cSeveral participants noted that, particularly in\u00a0the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects\u00a0on the economic outlook.\u201d<\/p>\n<p>While the Fed is aware of the risk, history suggests the crisis levels necessary for a monetary policy change remain in the distance.<\/p>\n<figure id=\"attachment_4816963\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/img.theepochtimes.com\/assets\/uploads\/2022\/10\/24\/image005.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"lazy wp-image-4816963\" src=\"https:\/\/www.theepochtimes.com\/assets\/themes\/eet\/images\/white.png\" data-src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image005-600x230-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"245\" \/><figcaption class=\"wp-caption-text\"><noscript><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4816963\" src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image005-600x230-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"245\" \/><\/noscript><\/figcaption><\/a> (Source: Bank of America)<\/figure>\n<p>Unfortunately, history is riddled with monetary policy mistakes where the Federal Reserve over-tightened. As the markets rebel against quantitative tightening, the Fed will eventually acquiesce to the selling deluge. The destruction of the \u201cwealth effect\u201d threatens the functioning of both equity and credit markets. As I will address in an upcoming article, we already see the early cracks in both the currency and Treasury bond markets. However, volatility is rising to levels where previous events occurred.<\/p>\n<figure id=\"attachment_4816965\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/img.theepochtimes.com\/assets\/uploads\/2022\/10\/24\/image006.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"lazy wp-image-4816965\" src=\"https:\/\/www.theepochtimes.com\/assets\/themes\/eet\/images\/white.png\" data-src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image006-600x344-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"367\" \/><figcaption class=\"wp-caption-text\"><noscript><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4816965\" src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/10\/image006-600x344-1.jpg\" alt=\"Epoch Times Photo\" width=\"640\" height=\"367\" \/><\/noscript><\/figcaption><\/a> (Source: Federal Reserve Bank of St. Louis Federal Reserve, Refinitiv; Chart: RealInvestmentAdvice.com)<\/figure>\n<p>As noted in \u201c<a href=\"https:\/\/realinvestmentadvice.com\/deflation-will-become-the-problem\/\">Inflation Will Become Deflation<\/a>,\u201d the Fed\u2019s primary threat remains an economic or credit crisis. History is clear that the Fed\u2019s current actions are once again behind the curve. Each rate hike puts the Fed closer to the unwanted\u00a0\u201cevent horizon\u201d\u2014beyond which events can\u2019t be controlled.<\/p>\n<p>\u201cWhat should be most concerning to the Fed and the Treasury Department is deteriorating demand at U.S. debt auctions. A key measure called the bid-to-cover ratio at the government\u2019s offering Wednesday of $32 billion in benchmark 10-year notes was more than one standard deviation below\u00a0the average for the last year,\u201d reported Bloomberg News.<\/p>\n<p>When the lag effect of monetary policy collides with accelerating economic weakness, the Fed will realize its mistake.<\/p>\n<p>A crisis in the Treasury market is likely much greater than the Fed realizes.<\/p>\n<p><i>Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.<\/i><\/p>\n<div class=\"author_wrapper\">\n<div class=\"one_author_block round\">\n<div class=\"top_row\">\n\t\t\t\t\t<a href=\"https:\/\/www.theepochtimes.com\/author-lance-roberts\"><img decoding=\"async\" src=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-content\/uploads\/2022\/09\/WEB_LanceRoberts.jpg\" alt=\"Lance Roberts\" \/><\/a><\/p>\n<p>Follow<\/p>\n<\/div>\n<div class=\"bio\">Lance Roberts is the chief investment strategist for\u00a0<a href=\"https:\/\/realinvestmentadvice.com\/investing\/\" data-saferedirecturl=\"https:\/\/www.google.com\/url?q=https:\/\/realinvestmentadvice.com\/investing\/&#038;source=gmail&#038;ust=1642114491368000&#038;usg=AOvVaw04OEDX_eYf_zfmkL4GRYGW\">RIA Advisors<\/a>\u00a0and lead editor of the\u00a0<a href=\"https:\/\/realinvestmentadvice.com\/newsletter\/\" data-saferedirecturl=\"https:\/\/www.google.com\/url?q=https:\/\/realinvestmentadvice.com\/newsletter\/&#038;source=gmail&#038;ust=1642114491368000&#038;usg=AOvVaw0PUzUI1BeJByWqOXzLibD7\">Real Investment Report<\/a>, a weekly subscriber-based newsletter to over 100,000 people nationwide. The newsletter covers economic, political and market topics as they relate to your money and life. He also hosts\u00a0<a href=\"https:\/\/www.youtube.com\/c\/therealinvestmentshow\" data-saferedirecturl=\"https:\/\/www.google.com\/url?q=https:\/\/www.youtube.com\/c\/therealinvestmentshow&#038;source=gmail&#038;ust=1642114491368000&#038;usg=AOvVaw1AdCE5tyC3DVY7AJHx-KQS\">The Real Investment Show<\/a>\u00a0podcast, and his opinions are frequently sought after by major media sources. His insights and commentary on trends affecting the financial markets earned him a spot in the 2020\u00a0<a href=\"https:\/\/www.refinitiv.com\/perspectives\/market-insights\/meet-the-top-100-social-media-influencers-in-financial-technology\/\" data-saferedirecturl=\"https:\/\/www.google.com\/url?q=https:\/\/www.refinitiv.com\/perspectives\/market-insights\/meet-the-top-100-social-media-influencers-in-financial-technology\/&#038;source=gmail&#038;ust=1642114491368000&#038;usg=AOvVaw1hHf0fDkb36gyJBNe1My3K\">Refinitiv Global Social Media 100 influencers list<\/a>.<\/div>\n<\/p><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>CommentaryThe Federal Reserve\u2019s next crisis is already brewing. Unlike 2008, where subprime mortgages froze counter-party trading in the credit markets as Lehman Brothers failed, in 2022, it might just be<\/p>\n","protected":false},"author":1,"featured_media":1709752,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","fifu_image_url":"https:\/\/cndimages.nyc3.digitaloceanspaces.com\/breaking-news\/wp-content\/uploads\/2021\/01\/IMG_2758-scaled-1.jpg","fifu_image_alt":"","footnotes":""},"categories":[547],"tags":[],"class_list":["post-1709749","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-the-bongino-report"],"fifu_image_url":"https:\/\/cndimages.nyc3.digitaloceanspaces.com\/breaking-news\/wp-content\/uploads\/2021\/01\/IMG_2758-scaled-1.jpg","_links":{"self":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/posts\/1709749","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/comments?post=1709749"}],"version-history":[{"count":0,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/posts\/1709749\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/media\/1709752"}],"wp:attachment":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/media?parent=1709749"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/categories?post=1709749"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/tags?post=1709749"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}