Bank of America issued a report on Thursday (20th) warning that the U.S. bond market is quite fragile, and the black swan hidden in the financial market may collapse due to large-scale forced selling or accidental collapse.
After the British government announced a large-scale tax cut plan at the end of September, which detonated the bond market turmoil, people from all walks of life worried that U.S. government bonds would be the trigger for the next wave of financial crisis. Currently, some of the largest buyers in the US$23.7 trillion U.S. government bond market are rushing. Retreat, including Japanese pension funds, life insurance companies, as well as foreign governments and U.S. commercial banks.
Bank of America strategists Mark Cabana, Ralph Axel, Adarsh Sinha released a report on Thursday that the U.S. bond market is quite fragile, and maybe just one shock will cause operational problems, which may come from large-scale forced selling or external emergencies.
Bank of America strategists emphasized that a U.S. bond crash is not the basic assumption of Bank of America, but the tail risk (Tail Risk) of such a situation is increasing day by day.
Tail Risk The risk of extreme events. Statistically, it is believed that according to the normal bell-shaped distribution, the probability of extreme values occurring is quite low, resulting in few people considering the risks caused by large fluctuations. In the investment world, Also known as “Black Swan”.
Bank of America strategists pointed out in the report,forced sellingIt may come from the tide of mutual fund redemption, the exit of hedge fund positions, and the deleveraging of risk parity strategies.andunexpected eventsThat might include severe funding stress at the end of the year, a Democratic Party sweeping victory in the midterm elections, and even a change in the Bank of Japan’s yield curve control policy.
As global inflation continues to deteriorate, the U.S. Federal Reserve and other central banks continue to raise interest rates, and uncertainty regarding the direction of the global economy and financial markets lingers, investors are facing a series of risks. US officials are very concerned that the turmoil that engulfed the UK bond market in September might repeat itself. U.S. Treasury Secretary Janet Yellen said last week that she is worried regarding the lack of liquidity in the U.S. bond market.
The lack of liquidity in Treasuries means U.S. Treasuries cannot be easily bought and sold without affecting prices, a trouble that basically ripples through all other risky assets.
Philadelphia Fed President Patrick Harker predicted on Thursday that the federal funds rate might be “well above 4%” by year-end given the lack of progress and disappointment at the Fed’s efforts to rein in inflation, raising expectations for a federal funds rate next year. The possibility of the funds rate breaking through 5% has greatly increased, far higher than the current 3%~3.25%, which also means that the bond market selling wave may further expand.
The 2-year U.S. Treasury yield rose to 4.611% on Thursday,10-Year U.S. Treasury YieldIt continued to rise to 4.233% and the 30-year U.S. Treasury yield came to 4.232%, further approaching the highest level in the past 11 to 15 years. Rising U.S. bond yields dampened the appeal of stocks, with the three major indexes falling for a second straight session on Thursday.
