The U.S. Treasury market is a bit like a lake
in the midst of a drought. All the action – fish, frogs, crawdads, and such – that
was once hidden in the depths has become a lot more visible as the water
shallows.
For decades, traders and investors have turned
to U.S. government debt – Treasury bills and bonds – because the market was so
deep that hefty trades could be placed without triggering significant price
changes, Bloomberg explained. That’s one
reason U.S. Treasuries have long been sought as a safe haven in tumultuous
times.
Recently, however, the U.S. Treasury market
has become more responsive to trades. The yield on 10-year Treasuries rose
above 2.3 percent last Tuesday for the first time in months before closing lower
on Friday. Some theorize yields are being pushed higher as investors try to
stay ahead of Federal Reserve activity or changing inflation expectations, but
others say the issue is liquidity.
Liquidity is the ease with which traders can
buy and sell bonds. In a highly liquid market, bonds can be bought and sold
easily. In a less liquid market, trading becomes more challenging. Bloomberg contends the U.S. Treasury has
become less liquid because of financial regulations that were adopted after
2008 to reduce risk taking. The regulations have made bond dealers less willing
to hold inventory and facilitate trades. Liquidity also was affected by the
Fed, which bought lots of government bonds in its effort to stimulate the
economy.
Bloomberg said, “How much depth has the market lost? A
year ago, you could trade about $280 million of Treasuries without causing
prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.”
Treasury market volatility had little affect
on U.S. stock markets, which finished the week higher.
*US treasuries may be considered “safe haven
investments but do carry some degree of risk including interest rate, credit
and market risk.
Debt, debt, debt, debt… the
world’s debt is 286 percent of its Gdp, according to The Economist. GDP stands for gross domestic product, which is the
value of all goods and services produced in a country or region.
So, the world owes almost three
times the value of what it produces. For the most part, governments have
incurred the debt as they’ve tried to help their countries recover from the
financial crisis and subsequent recession. A 2015 McKinsey and Company report explained it like this:
“Seven years after the bursting of a global credit bubble resulted in the
worst financial crisis since the Great Depression, debt continues to grow. In
fact, rather than reducing indebtedness, or deleveraging, all major economies
today have higher levels of borrowing relative to GDP than they did in 2007.
Global debt in these years has grown by $57 trillion, raising the ratio of debt
to GDP by 17 percentage points. That poses new risks to financial stability and
may undermine global economic growth.”
McKinsey’s findings show some types of debt grew more slowly from
2007-2014 as compared to 2000-2007. Increases in household debt and financial
debt growth rates (8.5 percent to 2.8 percent and 9.4 percent to 2.9 percent,
respectively) slowed sharply.
Other types of debt grew faster. Corporate debt grew at a slightly
faster pace during the period (5.7 percent to 5.9 percent), while government
debt grew rapidly (5.8 percent to 9.3 percent). Higher government spending was
welcomed in the depths of the recession when it served as a counter-balance to
low spending in the private sector.
Now, however, government debt levels are becoming a concern. McKinsey reported government debt has
risen to such high levels in six countries – Spain, Japan, Portugal, France, Italy,
and the United Kingdom – that unusual measures may be needed to reduce debt.
The most obvious way to decrease debt is to trim annual spending –
also known as reducing the fiscal deficit – but that could be counterproductive
since it often inhibits economic growth, and encouraging growth was the point
of taking on debt in the first place. McKinsey
recommends alternatives such as “extensive asset sales, one-time taxes on
wealth, and more efficient debt-restructuring.”
Weekly Focus – Think About It
“Culture makes people understand each other
better. And if they understand each other better in their soul, it is easier to
overcome the economic and political barriers. But first they have to understand
that their neighbour is, in the end, just like them, with the same problems,
the same questions.”
--Paulo Coelho, Brazilian novelist
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