The market for global bonds historically has been safe and subdued. However, in 2022, the international bond market has turned extremely volatile, with the selloff resulting in trillions of dollars’ worth of losses.
From U.S. Treasurys to UK gilts, many advanced economies have been affected by the chaos unfolding in the industry.
US Treasury Buybacks
Following a speech last week, U.S. Treasury Secretary Janet Yellen acknowledged that “we are worried about a loss of adequate liquidity in the market.” As a result, the Treasury Department could begin intervening in the $22.6 trillion U.S. government debt market, the world’s largest, by engaging in bond buybacks.
Treasury officials revealed that it would explore talks with primary dealers this month about the possibility of acquiring older debt to prevent market instability comparable to what recently occurred overseas. The move would bolster liquidity, mitigate volatility in Treasury bill issuance, and resolve potential market concerns. However, there could be costs to this program, the department warned.
“To create the cash needed to fund buybacks, Treasury would need to increase issuance of either bills or coupons, which would need to factor in quarterly refunding needs. Raising issue sizes could also be costly; for example, by increasing auction concession sizes and on-the-run yield levels,” the Treasury said in a report. “Buybacks that are too variable in size or timing might be at odds with Treasury’s regular and predictable debt management strategy.”
Dealers have until Oct. 24 to offer feedback about the proposal. This isn’t the first time that buybacks have been proposed, as the Treasury suggested the action in February 2015 and in August.
Since 2015, outstanding debt has doubled and stands at historical highs, and the debt-to-GDP is forecast to increase at a steady pace, Treasury data show. In addition, the share of public debt held by private investors will need to jump due to the Federal Reserve’s balance sheet runoff.
Although the Treasury’s proposal would be independent of the central bank, the institution reducing its $8.9 trillion balance sheet could add tremendous pressure to the U.S. bond market.
Bank of England Pauses Quantitative Tightening
Last month, the Bank of England (BoE) was forced to intervene in the UK government bond market as gilt yields skyrocketed. The central bank confirmed that it would suspend its bond sales and temporarily buy long-dated bonds for about $5.45 billion per auction as part of efforts to “restore orderly market conditions.”
The institution then expanded its UK government bond purchases to include roughly $5.4 billion in index-linked gilts from Oct. 11 to Oct. 14.
“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics, pose a material risk to UK financial stability,” the bank said in a statement.
This week, UK bond yields have stabilized, with the 10-year sliding to below 3.88 percent from around a peak of 4.5 percent.
The Financial Times reported on Oct. 18 that the BoE would delay the sale of government bonds to enhance stability in the domestic bond market. But the central bank dismissed the report as “inaccurate,” announcing on the same day that it intends to hold its first sale of gilts from its asset purchase facility on Nov. 1.
“The first gilt sales operation was scheduled to take place on 31 October 2022 and proceed thereafter,” the bank said in a statement. “In light of the government’s fiscal announcement now scheduled for 31 October 2022, the first gilt sale operation will now take place on 1 November 2022.”
Officials also confirmed that the BoE wouldn’t be selling long-duration bonds this year.
The central bank is trying to cut down on its $948 billion balance sheet, including bonds that were purchased during the global financial crisis of 2008–09, the coronavirus pandemic, and post-crisis recovery.
No Country for Old Yen
Earlier this month, the Japanese bond market set the record for no trades, as traders weren’t interested in acquiring the latest issuance of 10-year bonds for four consecutive sessions.
Since March 2021, the Bank of Japan (BoJ) has established a cap on the 10-year bond at 0.25 percent. This past spring, the central bank promised to purchase as many bonds as necessary each business day to ensure the limit remains intact. The institution is paying a higher price for bonds so that yields stay low, since yields and prices trade inversely.
The BoJ’s balance sheet totals about $7 trillion of government bonds, corporate debt, foreign currency assets, and equities.
BoJ policymakers have stressed the importance of keeping interest rates low and maintaining ultra-low monetary policy to support the sluggish economy. There has been some pushback to these policies, with critics urging rate hikes to support the yen, which has plunged to a 32-year low against the U.S. dollar. In addition, the pound-yen currency pair has risen about 30 percent year to date.
In a recent speech at a business leaders meeting in central Japan, BoJ board member Seiji Adachi rejected that proposal, explaining that it was premature to abandon these efforts due to growing “downside risks.”
“When looking at the global financial and economic environment surrounding Japan, downside risks are building up rapidly,” he said. “When downside risks are so high, we should be cautious of shifting toward monetary tightening.”
Bank of Japan Gov. Haruhiko Kuroda reiterated this position, arguing that removing massive monetary support could weaken an already fragile economy.
