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Bond markets face struggle to surf ‘Treasury tsunami’

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Market,United States,Debt

While slowing the pace of ‘quantitative tightening’ may well be discussed at this week’s Fed policy meeting, there’s little sign of it ending

Governments rarely correct deteriorating public finances until they meet some form of debt market disturbance, but the retreat of central banks from sovereign bond markets may eventually set the scene for a showdown.

Perhaps assuming the inflation and rate storm is finally over, markets have not demanded much additional compensation for funding ever larger deficits and national debt burdens. And yet, already facing hundreds of billions of new sovereign debt sales every quarter, the bond market’s relative calm to date is remarkable.

It concluded that as the Fed and other global central banks gradually back away from bond markets, investors will now start to price the debt flood more cautiously. “This transition should raise term premia to levels that are more consistent with fundamental drivers, which themselves would be under further pressure.”

With market pricing now seeing inflation settling above target at about 2.5% longer term, Barclays reckons the long-term neutral policy rate could be as high as 4%.

 

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