Bond market specialists warn of fragility in Fed pullout

Bond market specialists warn of fragility in Fed pullout

US government bond specialists are starting to fret over how the world’s most important market will cope when the Federal Reserve pulls back its pandemic-era support.

The $22tn Treasuries market forms the basis for pricing other assets around the world. It is famed for its liquidity — a broad term meaning it is easy to hop in and out of trades. But on several occasions since Covid-19 first hit, gaps in liquidity have appeared, creating jerky price movements.

When the Fed starts to trim its $120bn-a-month bond buying scheme, possibly as soon as November, some participants fear the lack of once-reliable market support could generate more instability.

The Treasury market system “is primed so that high-frequency traders and primary dealers pull back when there are problems”, said Yesha Yadav, a professor at Vanderbilt Law School in Nashville who studies Treasury market structure and regulation.

“The way this is set up is designed to fail. It is exceptionally fragile,” Yadav said.

The Treasuries market whipsawed in the Covid shock of 2020. That was perhaps the inevitable result of investors globally rushing to reshape portfolios. But central banks and regulators were also alarmed when at one point Treasury prices fell fast — the opposite to typical patterns