gold, page-113498

Cracks appearing in bond market (AFR)

But investors fret that the US dollar’s strength also reflects the high level of distress in financial markets, which has prompted investors to seek refuge in the greenback.The problem is that the Fed’s monetary tightening also involves the US central bank whittling down its massive $US9 trillion ($14.1 trillion) portfolio of US government bonds and mortgage-backed securities by $US95 billion a month – a process known as quantitative tightening (QT).And that’s causing cracks to appear in the $US25 trillion US bond market, which serves as the bedrock of the global financial system.Traders complain that liquidity – which refers to the ease of buying and selling an asset – is drying up in what is supposed to be the world’s deepest market. As a result, trading in many bonds has become more difficult.If the US bond market were to seize up, the Fed would have little choice but to follow the Bank of England’s example and launch a fresh bond-buying program.But most analysts agree that the Fed will only change direction and start injecting liquidity into the financial system if a significant financial institution – or a country – finds itself at risk of bankruptcy.At the same time, concerns are mounting about the intense strains now evident in the US corporate bond market.In their latest note, “This is How it Breaks”, Bank of America bond strategists warn that “with credit stress approaching critical levels, now is the time to put emphasis on risk management”.They argue the Fed should slow its clip of rate rises, and even potentially hit the pause button, “to allow the economy to fully adjust to all the extreme tightening already implemented, but still working its way through the financial system’s plumbing”.A failure to do so, they warn, “raises the risk of credit market dysfunction, which, if it occurred, would be difficult to contain and fix”.Meanwhile, even erstwhile bulls – such as JPMorgan’s global market strategist, Marco Kolanovic – are anxious that central banks are on the verge of committing a major policy blunder.In his latest note, Kolanovic argues that central banks made the mistake of continuing to ease monetary policy into what he dubs “the crypto/NFT/innovation bubble” in 2021.But now central bankers are pushing ahead with “unprecedented tightening” as the US economy slows and the war in Ukraine rages on.“The likelihood of central banks committing a policy mistake with negative global consequences has increased, and this started showing in various cracks in foreign exchange and rates markets,” he says.