Why the bond market is experiencing volatility similar to the 2008 financial crisis.

Why the bond market is experiencing volatility similar to the 2008 financial crisis.


Good morning team. I’m Phil Rosen.

The long-awaited Ethereum merger event, which experts say will increase energy efficiency on that blockchain by 99%, has ended, co-founder Vitalik Buterin said in a Twitter post.

Top financiers have been talking about it all week at the SALT conference in New York.

One macro investor said the merger parallels the corporate governance structure seen in equities, Insider’s Laila Maidan writes, while another executive said the event could lead to massive confusion.

Read our correspondent’s breakdown here.

Meanwhile, the stock market is still reeling from Tuesday’s beating, with the S&P 500 barely making a gain after its biggest one-day drop in two years.

But it’s not just stocks and cryptocurrencies that are churning this week.

Here’s a breakdown of what you want to know about the bond market and why it’s experiencing some of the most dramatic volatility since the 2008 financial crisis.

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Fed Chairman Jerome Powell testifies before the House Financial Services Committee.

Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, testifies before the House Financial Services Committee on June 23, 2022 in Washington, DC

Win McNamee/Getty Images

1. Most investors are watching the Fed rate hikes. but policymakers’ balance sheet plans could have an even bigger impact on markets.

The central bank has pledged to reduce its balance sheet, which consists mainly of US Treasuries and mortgage-backed securities.

During the pandemic, the Federal Reserve increased purchases of those bonds and securities, as well as corporate debt, in an effort to keep credit markets open.

At the time, the move worked, but it increased the Fed’s balance sheet from about $4 trillion to about $9 trillion today.

Now, as Jerome Powell moves to undo those holdingsbusiness liquidity in government bonds has declined significantly since April.

The Bloomberg US Government Securities Liquidity Index currently shows “stressed” conditions, already at precarious levels last seen at the height of the pandemic and on par with the 2008 crisis.

“The Fed may be creating different problems this time around. Business liquidity has steadily worsened throughout the year and rivals the worst of the March 2020 period. Corporate distress has also increased,” Ned Davis Research said in a note.

That bond market volatility is starting to bleed into the stock market, according to analysts.

“Realized volatility is almost seven percentage points above its historical average, while implied volatility is almost four points above its average,” NDR said. “You have to go back to the Great Financial Crisis and the European sovereign debt crisis to find comparable levels before the pandemic.”

Last week, Bank of America said that the decrease in liquidity in the Treasury market represents the greatest systemic risk for financial markets.

The drop in liquidity and the resilience of US Treasuries, BofA said, could be a bigger risk to stocks than the 2007 housing bubble.

How are you adjusting your investments to account for market volatility? Email prosen@insider.com or tweet @philrosenn.

In other news:

A view of hardware at the Jauniunai gas compressor station near Vilnius, Lithuania, on Thursday, May 5, 2022.

The EU gets around 45% of its gas imports from Russia.

access point

2. US stock futures struggled for direction early Thursday, as investors await new economic data and ponder the prospect of a large interest rate hike by the Federal Reserve. These are the latest market movements.

3. In the file: Adobe Inc., Ryanair and more, all reports. Also, keep an eye out for the weekly Unemployment Insurance Claims Report, Import/Export Price Indices, and Advance Retail Sales Report, due later this morning.

4. Here are six places to invest your money after August’s inflation reading shocked the stock market. The S&P 500 lost 4.3% on Tuesday after the more positive than expected CPI report. Three market experts explained their bets on where to keep their cash.

5. Massive floating gas terminals are heading to Europe to help solve its energy crisis. Dozens of ships pumping natural gas are headed for the continent as power-strapped nations continue to search for alternative supplies. Look at these photos of the huge ships.

6. The European Union wants to collect $140 billion in taxes on windfall profits from energy companies. The objective is to soften the blow that consumers are suffering from the increase in prices. As the president of the European Commission said: “It is a mistake to receive extraordinary record profits that benefit from the war and at the expense of consumers.”

7. Jeremy Siegel said that inflation is “exaggerated”. The Fed may make a policy mistake and get too tight if it doesn’t correct its view on high prices, the Wharton professor said. In his opinion, inflation has lagged behind official statistics for some 18 months and prices have already been falling.

8. Goldman Sachs just released new forecasts for economic and stock market growth. Analysts included a pessimistic “recession scenario” for the S&P 500, as well as what the index would likely do in two possible scenarios. The bank recommends these 12 actions if the bleakest scenario comes true.

9. This 33-year-old woman paid off $45,000 in debt and now teaches women how to take control of their finances. Focus on spending better instead of spending less, according to Laurie-Annie King. She explained how the “money aligned method” can help you get out of debt.

Wooden boards

Market insider information

10. Lumber prices fell on Wednesday after rising earlier in the week. The possibility of rail strikes raised fears of a disruption to supply of the key commodity, and mortgage rates topped 6% for the first time in 14 years, spelling trouble for housing demand.

Stay up to date with the latest market news throughout the day by checking out The Refresh from Insider, a dynamic audio news digest from the Insider newsroom. listen here

Curated by Phil Rosen in New York. (Comments or tips? prosen@insider.com or tweet @philrosenn).

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.


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