November 24, 2020

Global Financial Stability Watchdog Warns That Markets Remain Vulnerable

The report noted that fragile spots had arisen from recent trends, including a growing mountain of corporate debt, heavy global reliance on dollar-denominated debt, and the increasingly critical role of nonbank financial players in keeping markets chugging along. When the broad shock of the pandemic hit, there was a scramble for cash, and vulnerabilities were exposed.

Investors in mutual funds and other types of investments rushed to cash out and foreign holders sold bonds in search of dollars. And while banks themselves were resilient, they seemed unwilling to serve as go-betweens in a wildly uncertain backdrop. Many types of securities became hard to trade, and as market plumbing seized up, big investors abroad and hedge funds began to dump bond holdings.

“Market dysfunction was exacerbated by the substantial sales of U.S. Treasuries by some leveraged nonbank investors and foreign holders,” the report said. “This combination of large asset sales, together with the limited capacity or willingness of dealers to intermediate in some markets, became self-reinforcing.”

That Treasury market turmoil was especially bad news. The market for U.S. government debt is considered among the deepest and most liquid in the world, and it forms the backbone of much of the broader financial system.

The Fed swooped in to help. It first offered enormous infusions of short-term funding. When that didn’t work, it began to buy huge quantities of government-backed debt and rolled out a series of emergency lending programs, which helped to relieve pressure on everything from short-term corporate debt to embattled money market funds, where ordinary investors park savings for slightly higher returns than traditional bank accounts offer. It went to previously untested lengths to keep dollars flowing globally.

Article source: https://www.nytimes.com/2020/11/16/business/economy/financial-stability-board-report.html

Speak Your Mind