Beautiful Virgin Islands

Saturday, Aug 23, 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

Beautiful Virgin Islands
0:00
0:00
Close
Bunkers, Billions and Apocalypse: The Secret Compounds of Zuckerberg and the Tech Giants
Ukraine Declares De Facto War on Hungary and Slovakia with Terror Drone Strikes on Their Gas Lifeline
Animated K-pop Musical ‘KPop Demon Hunters’ Becomes Netflix’s Most-Watched Original Animated Film
New York Appeals Court Voids Nearly $500 Million Civil Fraud Penalty Against Trump While Upholding Fraud Liability
Elon Musk tweeted, “Europe is dying”
Far-Right Activist Convicted of Incitement Changes Gender and Demands: "Send Me to a Women’s Prison" | The Storm in Germany
Hungary Criticizes Ukraine: "Violating Our Sovereignty"
Will this be the first country to return to negative interest rates?
Child-free hotels spark controversy
North Korea is where this 95-year-old wants to die. South Korea won’t let him go. Is this our ally or a human rights enemy?
Hong Kong Launches Regulatory Regime and Trials for HKD-Backed Stablecoins
China rehearses September 3 Victory Day parade as imagery points to ‘loyal wingman’ FH-97 family presence
Trump Called Viktor Orbán: "Why Are You Using the Veto"
Horror in the Skies: Plane Engine Exploded, Passengers Sent Farewell Messages
MSNBC Rebrands as MS NOW Amid Comcast’s Cable Spin-Off
AI in Policing: Draft One Helps Speed Up Reports but Raises Legal and Ethical Concerns
Shame in Norway: Crown Princess’s Son Accused of Four Rapes
Apple Begins Simultaneous iPhone 17 Production in India and China
A Robot to Give Birth: The Chinese Announcement That Shakes the World
Finnish MP Dies by Suicide in Parliament Building
Outrage in the Tennis World After Jannik Sinner’s Withdrawal Storm
William and Kate Are Moving House – and the New Neighbors Were Evicted
Class Action Lawsuit Against Volkswagen: Steering Wheel Switches Cause Accidents
Taylor Swift on the Way to the Super Bowl? All the Clues Stirring Up Fans
Dogfights in the Skies: Airbus on Track to Overtake Boeing and Claim Aviation Supremacy
Tim Cook Promises an AI Revolution at Apple: "One of the Most Significant Technologies of Our Generation"
Apple Expands Social Media Presence in China With RedNote Account Ahead of iPhone 17 Launch
Are AI Data Centres the Infrastructure of the Future or the Next Crisis?
Cambridge Dictionary Adds 'Skibidi,' 'Delulu,' and 'Tradwife' Amid Surge of Online Slang
Bill Barr Testifies No Evidence Implicated Trump in Epstein Case; DOJ Set to Release Records
Zelenskyy Returns to White House Flanked by European Allies as Trump Pressures Land-Swap Deal with Putin
The CEO Who Replaced 80% of Employees for the AI Revolution: "I Would Do It Again"
Emails Worth Billions: How Airlines Generate Huge Profits
Character.ai Bets on Future of AI Companionship
China Ramps Up Tax Crackdown on Overseas Investments
Japanese Office Furniture Maker Expands into Bomb Shelter Market
Intel Shares Surge on Possible U.S. Government Investment
Hurricane Erin Threatens U.S. East Coast with Dangerous Surf
EU Blocks Trade Statement Over Digital Rule Dispute
EU Sends Record Aid as Spain Battles Wildfires
JPMorgan Plans New Canary Wharf Tower
Zelenskyy and his allies say they will press Trump on security guarantees
Beijing is moving into gold and other assets, diversifying away from the dollar
Escalating Clashes in Serbia as Anti-Government Protests Spread Nationwide
The Drought in Britain and the Strange Request from the Government to Delete Old Emails
Category 5 Hurricane in the Caribbean: 'Catastrophic Storm' with Winds of 255 km/h
"No, Thanks": The Mathematical Genius Who Turned Down 1.5 Billion Dollars from Zuckerberg
The surprising hero, the ugly incident, and the criticism despite victory: "Liverpool’s defense exposed in full"
Digital Humans Move Beyond Sci-Fi: From Virtual DJs to AI Customer Agents
YouTube will start using AI to guess your age. If it’s wrong, you’ll have to prove it
×