Weekly Comic

By Scott Kanowsky

-- Investors in global bond markets in the developed world are,cfds by all appearances, on edge these days.

Yields on sovereign debt have soared to their highest levels in years, spurred on by many central banks around the world, looking determined to continue tightening monetary policy to quell soaring inflation, even if it may weigh on broader economic growth.

The U.S. Treasury bond, a crucial benchmark, has seen its yield comfortably top 4% after it started the year at around 1.5%. Meanwhile, the yield on its counterpart has ballooned even higher, a development that historically suggests a recession is looming in the world's largest economy. Prices typically fall as yields rise.

Researchers at the BlackRock Investment Institute are clearly biting their fingernails: A study last week said darkly that normally safe-haven government bonds may not offer much protection should central banks continue hiking borrowing costs to cool down red-hot inflation.

Meanwhile, from Wall Street to Washington D.C., concerns over liquidity are heaping additional strain on already stressed U.S. Treasuries - a crucial cog in the engine of the global economy.

A measure of market liquidity from JPMorgan recently dropped to its lowest level since the early days of the pandemic in March 2020. A Bloomberg index shows investors are now finding it the most difficult to get deals done in the Treasury market in about two and a half years.

Driving these jitters is the Federal Reserve, which has laid out plans to scale back its huge $9 trillion balance sheet. The Fed hopes that by rolling back this bond buying - and thereby reversing much of a program partly designed to help prop up banks during the initial economic fallout from the COVID-19 crisis - it can take some more steam out of price growth.

But the consequences of this decision are still far from certain.

In September, a strategist at Bank of America flagged that the Fed rapidly pulling liquidity out of the Treasury market represents "one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004 - 2007."

Even U.S. Treasury Secretary Janet Yellen has warned that she is "worried" about maintaining adequate liquidity in bond markets. In November, U.S. regulators will debate possible changes in the structure of the Treasuries market to try to address potential systemic issues.

This is for good reason, as Rishi Sunak's sudden rise to power in the United Kingdom has shown. His predecessor as prime minister, Liz Truss, found herself without the support of her party following the release of a disastrous "mini-Budget" filled with unfunded tax cuts that sent British government bond yields, known as Gilts, spiking.

These gyrations, along with signs of sputtering in pension funds, led the Bank of England to shore up U.K. debt markets through £5 billion in temporary debt purchases. Truss's premiership is now over, but not before the chaos also impacted bond markets in the U.S. and Europe.

Policymakers at the European Central Bank will on Thursday, with the Frankfurt-based institution expected to reveal more details about its rate hike path and, potentially, its own pullback on bond buying.

Earlier this week, Eurozone borrowing costs dropped on a report that the Fed could begin to slow its pace of policy tightening. Investors are hoping the ECB may follow suit.

But the worries persist, echoing a sentiment attributed to American political strategist James Carville: "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

It remains to be seen whether the recent bond market turmoil of the past few weeks may just prove him right.

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