There is a growing realization in financial and media circles that the sell-off in the US bond market, which has seen interest rates rise rapidly, is the product of far-reaching changes in global financial markets.Thank you for reading this post, don't forget to subscribe!
Expert Dilip Patel works at his post on the floor of the New York Stock Exchange on Tuesday, Oct. 3, 2023. Wall Street is sinking sharply as it focuses on the downside of a surprisingly strong job market. [AP Photo/Richard Drew]
The initial expectation was that the turmoil was the result of the US Federal Reserve increasing interest rates from near zero to more than 5 percent over the past 18 months. After some initial turmoil, stability will return as the market adjusts itself to the understanding that rates will remain high longer than initially expected.
However, this perception is giving rise to the recognition that the period in which growth in US government debt could be financed endlessly because interest rates were at historic lows has ended.
The scope of the selloff, which has seen yields on 10-year Treasury bonds hover around 4.9 percent (prices and yields move in opposite directions), is indicated in some calculations done by Bloomberg.
It estimates that about 46 percent of the value of bonds with maturities of ten years or more has been lost due to market declines. And 30-year bonds have lost 53 percent of their face value.
The issues of what the decline means in the long term and what structural changes are at work were discussed in a weekend article. wall street journal (WSJ) The headline is “Wall Street isn’t sure it can handle all of Washington’s bonds.” It began with what it called the “autumn bond market wreck” challenging the long-held belief that the US government cannot sell too many Treasuries.
“Ever since the Federal Reserve broke the inflation scare of the 1980s, Wall Street and Washington have racked up trillions of dollars of losses, relying on America’s global position to provide a sustainable demand for its debt that Can finance the expenses. Now the sharp decline in the prices of Treasuries – considered the world’s safest and easiest investment to trade – is forcing markets to face the possibility that the rates needed to hold all this debt will be lower than anyone expected. There will be more.
The financial press always avoids reference to class struggle in its analysis or makes only passing reference to it. But in reality, fluctuations in financial markets are always a distorted expression of underlying class relations.
What the WSJ called the “inflation scare” of the 1980s was a working-class wage struggle that “broke out” due to massive interest rate increases, leading to the deepest recession since the 1930s. State violence – notably Reagan’s crushing of the air traffic controllers’ strike in 1981 – and the betrayal of the trade union bureaucracy that facilitated this attack.
The forced suppression of class struggle was an important factor in shaping fiscal and monetary policy.
This enabled successive governments to run massive deficits, pushing debt to record highs at very low interest rates, while the Fed pumped money into the financial system to finance speculation. This process began with the stock market crash of October 1987 and proceeded largely through quantitative easing in the wake of the 2008 crisis.
These conditions have changed now. The working class in the US and internationally is engaged in the most significant class battle in four decades, to which the WSJ makes only brief reference. It says only that “the strength of the labor market is one reason bond yields have risen this year.”
As it is said, the bond market “collapse” was caused by the Fed’s recognition that Covid-induced inflation was not “temporary” and that what it called a “very tight” labor market was fueling working-class wage struggles. was giving. , The Fed tried to suppress these conflicts through high interest rate regimes to slow the economy or even induce recession.
Thus, the two conditions that determined the operation of financial markets over the past several decades – the virtually endless supply of free money to financial and industrial corporations and the suppression of class struggle – have been reversed.
Here lie the seeds of another financial crisis as it becomes increasingly difficult to finance the US government debt, which continues to grow due to ever-increasing military spending.
Questions are being raised whether the Treasury auction, in which it sells new debt, could fail. It was once thought to be out of the question, but now it is considered a possibility. There have already been warning signs – the Treasury market freeze in March 2020 and a similar but smaller event a year later.
There are many factors that influence market operations.
First, the size of the administration’s financing demands is huge. More than $1.76 trillion of Treasury bonds were issued in September. As the WSJ noted, this is “higher than any full year in the last decade, barring the pandemic surge of 2020” in which there is unlikely to be any decline.
Then the question is who will buy the government debt. Banks have been the mainstay of the market, but they are starting to step back.
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This is for two reasons. Rules brought in to strengthen banks’ capital base after the 2008 crisis have made it more expensive for them to hold bonds. Secondly, the market has declined since the March scare when Silicon Valley Bank collapsed along with two others due to losses on their holdings of Treasury bonds due to falling prices.
Three of the four largest bank failures in American history were caused not least by declines in the prices of the bonds in which they were heavily invested.
Reporting on how “huge US government borrowing” is exacerbating “bond market pain” financial Times AllianceBernstein cited comments from Fahad Malik, a fixed income portfolio manager.
“More than anything, banks are not coming on the scene to buy these Treasuries. There are no marginal buyers, so these moves escalate,” he said.
Pointing to underlying changes in the market, he said that “economic data should not cause the market to move as much as it is.” In other words, the bond market reaction to adverse data is larger than before.
Another factor is the Fed’s withdrawal. It is reducing its holdings of Treasury bonds as part of its program of interest rate hardening, aimed at trying to quell working-class wage struggles.
International changes are also playing their role. Japan and China, both of which run trade surpluses with the US, have invested large amounts in the US Treasury market. Although they have yet to make significant cuts, they are scaling back.
Apart from this, there is increasing concern about the stability of the US market as well as the continuous deadlock in Congress regarding the debt limit and government spending. Many countries, including China, Brazil and Saudi Arabia, are making efforts to reduce their dependence on the dollar in financing international trade.
This confluence of factors is working to create a significant crisis situation in the world’s largest and most important financial market, that of US government debt. It is not possible to predict when, how and in what form it will emerge. But there is no doubt that the reaction, as history and the experience of 2008 shows, will be intensified attacks on the working class.
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