🚰 Liquidity problems

Plus: IMF enters the chat | Wednesday, September 28, 2022

Open in app View in browser   Presented By AcreTrader   Axios Macro By Neil Irwin and Courtenay Brown · Sep 28, 2022 The Bank of England is moving to bring order back to the bond market, which has been more than a little disorderly in recent days. In today's edition of Macro, we examine why — and what it might mean for the U.S. Plus, the IMF's biting criticism of the U.K.'s tax-cutting plan. Situational awareness: Our colleague Hans Nichols scoops that the White House is weighing potential major changes to the top of its economic policy ranks after midterms, with Treasury Secretary Janet Yellen and National Economic Council director Brian Deese among potential departures. Go deeper. Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 631 words, a 2½-minute read.     1 big thing: Bond market liquidity fears Illustration: Maura Losch/Axios   The market for government debt of big, rich countries like the United States and United Kingdom is, famously, supposed to be the deepest and most liquid on earth. In recent days, that has not really applied, particularly in Britain. Bond prices are careening around wildly, in ways that indicate serious strains in the global financial system. Why it matters: Government debt markets are showing signs of the kinds of turbulence and lack of liquidity that, should it persist, will make all financial assets more volatile and make a looming economic downturn worse. Driving the news: The BoE announced this morning it will buy long-term government debt on whatever scale necessary to "restore orderly market functioning." It also delayed the start of its quantitative tightening program meant to unwind securities acquired in its pandemic stimulus. This is an unusual situation, and comes after some of the biggest single-day swings in U.K. interest rates ever recorded. There were reports from the British press that the bank was trying to prevent runs on some pension funds. Britain's central bank is simultaneously tightening policy (by raising interest rates to try to bring down inflation) and, de facto, loosening policy (by buying bonds to try to restore functioning to the bond market). It is a highly uncomfortable balancing act, especially at a time the value of the pound is plunging and the credibility — and competence — of British policymakers is in question. Meanwhile, things aren't nearly as worrying stateside as they are in Britain. But there are some signs that the market for U.S. Treasuries, a bigger and more globally important market than that for U.K. gilts, is seeing strains. A Bloomberg index that captures illiquidity in the bond market has soared in recent days, to levels only just shy of those reached during the worst of the pandemic in March 2020, Jim Bianco of Bianco Research notes. What they're saying: "There is no doubt that the Treasury market is illiquid these days, but it is not dysfunctional," said Roberto Perli and Benson Durham of Piper Sandler, in a research note. "Markets can function even with poor liquidity; it is a sharp and fast reduction in liquidity that makes them dysfunctional." "The Treasury market simply is not there, and the Fed won't do anything different unless the situation changes," they write. The bottom line: These turbulent times in markets could make the economic pain ahead worse. But don't count on the Fed to come to the rescue, given its resolution to bring down inflation. Go deeper.     A message from AcreTrader A new way to Invest in an old asset: farmland     Land has historically produced significant wealth with limited correlation to a volatile market, but most investors haven't had access — until now. AcreTrader offers passive ownership in farm and timber properties, helping diversify your portfolio with real assets. Find out how.     2. The UK's newest critic Photo: Al Drago/Bloomberg via Getty Images   The U.K. has no shortage of critics lately. But a notable party piled on yesterday: the International Monetary Fund, which issued a blunt rebuke of a G-7 nation. Driving the news: In a statement, the IMF urged the British government to "re-evaluate" its tax-cutting proposals, which it said would likely increase inequality. What they're saying: "Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it important that fiscal policy does not work at cross purposes to monetary policy," the IMF said. Why it matters: In IMF-speak, this is as clear of an attack on a fiscal plan as it comes. Moreover, it's rare for the global lender to comment on rich countries' policies outside of its annual economic evaluations. The backdrop: The proposal has sparked turmoil in financial markets, sending the pound and bond prices into free-fall. "I think markets are functioning well," Treasury Secretary Janet Yellen told reporters yesterday. "The overall environment is one of high inflation in many advanced economies. Central banks are addressing it in almost all countries — other than China — but operating at different speeds and different paces." Per Bloomberg, Yellen would not comment on the U.K.'s economic policies.     A message from AcreTrader Maybe it's time for a boring investment     Over the past 20 years, farmland has consistently outperformed other asset classes over time with slow and steady growth. Okay, but: What about stocks? Unlike farmland returns, the S&P 500 is down 17.5% YTD. Try something boring like farmland.   Are you a fan of this email format? It's called Smart Brevity®. Over 300 orgs use it — in a tool called Axios HQ — to drive productivity with clearer workplace communications.   Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here. Sponsorship has no influence on editorial content. Axios, 3100 Clarendon B‌lvd, Arlington VA 22201   You received this email because you signed up for newsletters from Axios. Change your preferences or unsubscribe here.   Was this email forwarded to you? Sign up now to get Axios in your inbox.   Follow Axios on social media: