As Fed (fed) tightens monetary policy , pushing up bond yields, financial market crisis looms, and the UK Treasury market becomes the first developed country financial market in trouble.
U.S. Treasury Secretary Janette YellenWarning that the U.S. Treasury market will no longer have "adequate liquidity". On the other hand, the cost of borrowing US dollar has soared to its peak in March 2020, indicating that the dollar liquidity is tightening.
According to Bloomberg, Yellen said in a Q&A session after a speech in Washington on Monday: "We are worried about the loss of liquidity in the U.S. Treasury market." She said that brokerage proprietors who make bonds have not significantly expanded their balance sheets, and the overall supply of bonds has begun to increase.
However, she believes that the Fed's resident buyback arrangement may help increase liquidity in the Treasury market.
To date, the total outstanding public debt has increased by approximately $7 trillion. However, large financial institutions’ reluctance to build a market is mainly affected by the banks’ so-called supplemental leverage ratio (SLR).
SLR measures the ratio of bank capital (i.e. funds raised from investors and earned from profits) to assets such as lending. According to Fed regulations, capital held by large U.S. banks must be maintained at least 3% of all risky assets (including lending, investment and real estate). This can effectively prevent banks from undertaking too much lending business when the capital level has not increased.
It is worth noting that the US dollar's borrowing costs soar, which indicates that the Fed's aggressive rate hike has caused the collapse of US dollar liquidity. According to the " Wall Street Journal " and Reuters , the three-month cross- currency swap between and the US dollar has expanded to its highest level since March 2020, mainly because the UK government bond market fluctuates too much, affecting asset prices. Since late September, the spread has been at a high level.
A similar pattern appears in USD-JPY exchange rate trading, indicating that banks outside the United States are willing to obtain USD funds at a premium. Tobias Adrian, head of currency and capital markets at the IMF (imf), said the volatility is unusual and there are signs of a shortage of the dollar.
Another sign that the dollar is facing tightening pressure is the increase in the dollar swap between the Federal Reserve and foreign central banks. The Swiss National Bank reached a seven-day, $3.1 billion liquidity swap with the Federal Reserve last week, the largest deal since 2020.
