Saudi Press

Saudi Arabia and the world
Tuesday, Jul 15, 2025

Two Fed Presidents Hit The Alarm Over The Broken Treasury Market... Which They Caused

Two Fed Presidents Hit The Alarm Over The Broken Treasury Market... Which They Caused

Given the biggest buyer of bonds since the financial crisis is slowing purchases, why would anyone else want them? The Fed not buying bonds is defacto selling.
In the usual post-FOMC meeting jawboning circus, today we had not one but two Fed officials discussing not the topic du jour - Fed policy errors and soaring inflation - but something far more ominous: the broken Treasury market. Just days after a catastrophic 30Y Treasury auction which may well be the harbinger of what's to come as the market realizes that i) tapering is tightening and that without the buyer of first resort we will finally get some price discovery and ii) inflation, contrary to the latest Fund Manager Survey, is not transitory, both Cleveland Fed president Loretta Mester and NY Fed president John Williams warned markets that the Treasury market is "not as resilient" as it should be, and that even modest stress could break it. Unfortunately neither of them admitted that it's entirely the Fed's fault that what was once the world's most liquid market has become a political tool to be abused by central planners and power hungry politicians.

NY Fed's Williams was first, patting himself on the back by saying that the Fed's bazooka QE unleashed at the onset of the pandemic, “along with prompt fiscal measures enacted by Congress and emergency steps taken by the Federal Reserve and other government agencies, ultimately proved successful at restoring functioning in the Treasury and other financial markets” And while these measures "averted what could have been a severe financial crisis that would have had devastating effects on the economy" they are "also a stark reminder that these markets are not nearly as resilient as they should be.”

His next statement came dangerously close to the truth: “One thing that is clear when examining the causes of these market disruptions is that they were not primarily driven by economic forces, but rather by a failure of the markets to function in the ways they were expected to do in response to those particular circumstances” he said, failing to mention that the Fed owns a quarter of all Treasurys and up until now, has been monetizing every dollar in debt sold by the Treasury since March 2020, in the process becoming the only marginal price setter in the bond market.

Next up was Cleveland Fed President Loretta Mester, who said that "with uncertainty related to the pandemic, many investors sought to move to cash and even liquidated their positions in U.S. Treasuries that are seen as haven assets, showing “how uncertain” the environment was in March 2020, and necessitating Fed actions to re-establish functioning of that market, she says also ignoring the fact that the market was no longer functioning in the first place because of the Fed.

But then she also made a surprising admission, saying that the Fed’s actions “didn’t address the underlying structural issues that propagated the stresses.” However, like Williams, instead of looking in the mirror and admitting the Treasury markets in the US - like that in Japan - is broken because the Fed is now openly engaging in MMT/Helicopter Money and monetizing the deficit, there is no longer a Treasury market with fair and transparent price discovery. Instead she blamed new players, interconnections and technologies, who are “new sources of vulnerability,” as financial activity is increasingly moving outside of the banking system and that means that credit risk is increasingly being intermediated and outside the banking sector.

“We’re just going to need to ensure we have the ability to monitor risks and vulnerabilities not only in the banking system, but in the nonbank financial sector,” she said, clearly seeking to put all other financial actors under the Fed's supervision. The same "supervision" which failed to realize the simplest thing: when you become the primary - and for the past two years only - source of demand in the Treasury market, it is no longer a market but a political tool.

Having discussed the topic of the broken Treasury market (and every other market) due to the Fed's actions (and in the latest just released note from Rabobank's Michael Every we read that "It’s no longer a secret that markets are irrational due to central bank action") pretty much non-stop since our inception, and since there is little we can add to the beating of this particular dead horse, we will give the mic to Bloomberg's Vince Cignarella who cuts to the chase, writing that "Regulators Discuss Bond Liquidity, an Issue of Their Own Making."

His full thoughts below:

Financial regulators are meeting on Wednesday to address recent wild price swings in the U.S. Treasury market, presumably to find out why markets all of a sudden aren’t working properly. But traders say that, once again, rules created in Washington are having unforeseen consequences.

The Volcker rule which limited banks from taking large proprietary positions limits the amount of risk and, therefore, the amount of inventory banks can keep on their books. In times of QE, that’s no problem, the more supply the better. Bonds just kept going up as the Fed kept the cash coming.

But now, partly because of rising inflation expectations and partly because of the start of tapering, bonds have been falling and traders can’t hold and trade them the way they used to. Frankly, given the biggest buyer of bonds since the financial crisis is slowing purchases, why would anyone else want them? The Fed not buying bonds is defacto selling.

This is the regulatory agencies’ own doing and creating more rules to fix broken rules is not likely to help. Prices are volatile as traders try to trade the timing of the next rate hike. And if a central bank is eventually going to be trimming their balance sheet and removing liquidity it probably isn’t too smart to take them on. I tried it with the BOJ once in the 80’s, it did not end well.
Newsletter

Related Articles

Saudi Press
0:00
0:00
Close
Nvidia Becomes World’s First Four‑Trillion‑Dollar Company Amid AI Boom
Iranian President Reportedly Injured During Israeli Strike on Secret Facility
Kurdistan Workers Party Takes Symbolic Step Towards Peace in Northern Iraq
BRICS Expands Membership with Indonesia and Ten New Partner Countries
Elon Musk Founds a Party Following a Poll on X: "You Wanted It – You Got It!"
AI Raises Alarms Over Long-Term Job Security
Saudi Arabia Maintains Ties with Iran Despite Israel Conflict
Russia Formally Recognizes Taliban Government in Afghanistan
Mediators Edge Closer to Israel-Hamas Ceasefire Agreement
Emirates Airline Expands Market Share with New $20 Million Campaign
House Oversight Committee Subpoenas Former Jill Biden Aide Amid Investigation into Alleged Concealment of President Biden's Cognitive Health
Amazon Reaches Major Automation Milestone with Over One Million Robots
Meta Announces Formation of Ambitious AI Unit, Meta Superintelligence Labs
China Unveils Miniature Insect-Like Surveillance Drone
Marc Marquez Claims Victory at Dutch Grand Prix Amidst Family Misfortune
Iran Executes Alleged Israeli Spies and Arrests Hundreds Amid Post-War Crackdown
Trump Asserts Readiness for Further Strikes on Iran Amid Nuclear Tensions
Iran's Parliament Votes to Suspend Cooperation with Nuclear Watchdog
Trump Announces Upcoming US-Iran Meeting Amid Controversial Airstrikes
Trump Moves to Reshape Middle East Following Israel-Iran Conflict
NATO Leaders Endorse Plan for Increased Defence Spending
U.S. Crude Oil Prices Drop Below $65 Amid Market Volatility
Explosions Rock Doha as Iranian Missiles Target Qatar
“You Have 12 Hours to Flee”: Israeli Threat Campaign Targets Surviving Iranian Officials
Oman Set to Introduce Personal Income Tax, First in Gulf
Germany and Italy Under Pressure to Repatriate $245bn of Gold from US Vaults
Iran Intensifies Crackdown on Alleged Mossad Operatives After Sabotage Claims
Trump Praises Iran’s ‘Very Weak’ Response After U.S. Strikes and Presses Israel to Pursue Peace
WATCH: Israeli forces show the aftermath of a massive airstrike at Iran's Isfahan nuclear site
We have new information and breaking details to share about what is shaping up to be a historic air campaign tonight
Six Massive Bombs Dropped on Fordow; Trump: 'A Historic Moment for the U.S., Israel, and the World'
Fordow: Deeply Buried Iranian Enrichment Site in U.S.–Israel Crosshairs
United States Conducts Precision Strikes on Iran’s Nuclear Sites
US strikes Iran nuclear sites, Trump says
Pakistan to nominate Trump for Nobel Peace Prize.
Israel Confirms Assassination of Quds Force Commander in Tehran
16 Billion Login Credentials Leaked in Unprecedented Cybersecurity Breach
Senate hearing on who was 'really running' Biden White House kicks off
G7 Leaders Fail to Reach Consensus on Key Global Issues
Mass exodus in Tehran as millions try to flee following Trump’s evacuation order
Iranian Military Officers Reportedly Seek Contact with Reza Pahlavi, Signal Intent to Defect
Vietnam Emerges as Luxury Yacht Destination for Ultra‑Rich
China's Iranian Oil Imports Face Disruption Amid Escalating Middle East Tensions
Trump Demands Iran's Unconditional Surrender Amid Escalating Conflict
Israeli Airstrike Targets Iranian State TV in Central Tehran
President Trump is leaving the G7 summit early and has ordered the National Security Council to the Situation Room
Netanyahu Signals Potential Regime Change in Iran
Analysts Warn Iran May Resort to Unconventional Warfare
Iranian Regime Faces Existential Threat Amid Conflict
Energy Infrastructure Becomes War Zone in Middle East
×