The below chart and commentary come from the IMF’s global financial stability report released last week (picked up by Macroman and Barry Ritholtz) — and they show recent trends in US debt:
In sum, this analysis suggests that fiscal concerns do not appear to have led to a higher cost of funding during the most recent run-up in nominal bond yields. Rather, improving growth prospects and higher term premia are the main factors pressuring long-term rates higher. Furthermore, QE2 does not appear to have contained long-term rates. While the anticipation of QE2 initially led to a sharp compression in term premia, that impact was either fleeting or has been more than offset by other factors.
Now Standard & Poor’s has become the first of the big three rating agencies to take (outlook) action on US debt, on concern of deficit impasses and contingent liabilities like banks and student loans.
Which means, perhaps, the pink bit in the above chart might get a touch bigger.
At the very least, that new era of US Treasury price volatility could finally be here. On Monday the yield on the benchmark 10-year rose 2 basis points to 3.43 per cent after S&P made its announcement. 30-year yields were up 5bps to 4.52 per cent, while two-year yields actually fell. US Treasury volatility is not an ideal thing given the bonds act as a linchpin for the very large repo market.
Back in early 2008, there was some talk of banks upping their required haircuts on US debt used in repo transactions. And not because they thought the bonds were likely to default, but simply because there had been “bigger price swings in the Treasury market, which affect[ed] value,” as Bloomberg reported at the time. As blogger London Banker pointed out to us later on; margin calls force liquidation and if US Treasuries volatility forces mass margin calls, it will act as a double hit to global liquidity.
You can track UST volatility over here with a (delayed) Merrill Lynch MOVE index.
Related link:
‘A new era of Treasury price volatility’ – FT Alphaville
Margin calls prompt sales, drive shares even lower – New York Times, 2008