Concern is growing on Wall Street about an upcoming economic disaster

Concern escalated among investors and economic analysts in the United States, in the wake of Black Tuesday, as stock exchanges recorded “Wall Street“Its worst performance in more than two years, and it suffered the largest daily losses since June 2020, after expectations that the US Federal Reserve will continue to raise interest rates in order to control inflation.

A report published by the “Market Watch” economic website said that there is a growing sense of anxiety among traders, academics and experts in the US dollar market, which has a volume of 24 trillion dollars, as they fear an upcoming crisis that may result from the policy of “quantitative tightening” that the Federal Reserve has begun to adopt.

The report says that some bankers and traders worry that already diminishing liquidity in the market could set the stage for economic disaster, or at least it “has a host of other flaws”.

A “stark warning” was issued earlier this month, when Ralph Axel, an interest rate strategist at Bank of America, warned the bank’s clients that “declining liquidity and the resilience of the Treasury market poses one of the biggest threats to financial stability.” world today, and potentially worse than the 2004-2007 housing bubble.”

The Market Watch report says that the US Treasury market plays an important role in the global financial system, as its returns are a benchmark for trillions of dollars in loans, including most mortgages.

Worldwide, the 10-year US Treasury bond yield is considered a “risk-free rate” as it sets a baseline against which many other assets, including stocks, are valued.

Ralph Axel said that if the treasury market stalls again, as it almost did in the recent past, the various credit channels including corporate, household and government borrowing are likely to stop.

In the absence of a major and systemic crisis, poor liquidity causes a host of other drawbacks to investors, market participants, and the federal government, including higher borrowing costs, increased volatility between assets, and other problems.

And the Market Watch report says that dwindling liquidity was a problem before the Fed began allowing its massive $9 trillion balance sheet to shrink last June, but this month the breakup will accelerate to an unprecedented $95 billion per month.

“Liquidity is very bad right now,” said John Luke Tyner, a large investment portfolio manager.

Treasury debt is a global reserve asset, just as the US dollar is a reserve currency, meaning it is widely owned by foreign central banks that need access to dollars to help facilitate international trade.

To ensure that the US Treasury market retains this position, market participants must be able to trade its bonds quickly, easily and inexpensively, as federal economist Michael Fleming wrote in a 2001 paper, “Measuring Treasury Market Liquidity.”

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