One of the great privileges that the US enjoys in being at the center of the financial system is that when there is a crisis, markets rush into long-dated Treasuries, driving borrowing costs lower. This is a natural hedge to bad news and was most-clearly seen at the start of the financial crisis when, despite the implosion in US banks and home prices, Treasury yields dropped.
That hasn't happened this time and it didn't happen at the start of covid, forcing the Fed to buy trillions of bonds in unlimited QE.
Covid was forgivable as a one-off but now it's a pattern. That's a huge problem for US policymakers because the next time there is a crisis, you would be foolish to rush into Treasuries. If anything, I would now argue that it's the opposite, which will remove further liquidity and exacerbate a blowup in yields.
Something will have to be done or the Fed is going to be forced into premature QE again next time (or sooner).
This article was written by Adam Button at www.forexlive.com. Read More Details
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