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Risk aversion persists as equity cash flows into bonds with major averages falling around 2%, keeping pressure on interest rates.
. . Great Britain and the European Union are said to be on the verge of signing a free trade agreement on Thursday.
. . (Bloomberg) - The U. . S.. . The financial market disaster in March rekindled calls for a revision of the fundamentals of the nearly $ 21 trillion cornerstone of the global economy and eased pressure on the Federal Reserve to interface with massive lifelines. The liquidity of the bonds disappeared nine months ago when investors panicked over the pandemic and stopped trading. This forced the central bank to fill the void and buy debt at unprecedented speed and size in order to get business back to normal. To prevent a further flare-up, Fed officials - including Chairman Jerome Powell this week - addressed the possibility of strengthening the foundation of the market with a broad-based central clearinghouse to secure deals and during times of stress with increased activity to deal with. A revision could remove a source of criticism directed against the Fed: By halting the bond market in March, a leveraged trade popular with hedge funds was saved. A central clearinghouse that handles more, if not all of the Treasuries business, backed by the capital provided by its members, could have eliminated the need for such dramatic Fed action. Only about a fifth of the market goes through Fixed Income Clearing Corp.. . , the only central clearing house in Treasuries. The dwindling role of banks and the proliferation of electronic merchants have diminished the role of the FICC. This has led to widespread fear that the treasury market is too opaque and its risks too difficult to understand because of the diversity of clearing and settlement methods. "Central clearing is a reform that could be very useful in the functioning of the treasury market," said Darrell Duffie, professor of finance at Stanford University. “Traders can simply no longer meet their liquidity needs. And while these extreme events have only happened occasionally, unless nothing changes, they will happen more regularly because the market is growing exponentially. "There is a lot at stake in getting the reforms right. The Congressional Budget Office estimates that outstanding national debt will increase by about $ 10 trillion over the next decade. And Treasuries are the standard that can be used to determine the risk and price of anything from mortgages to corporate bonds. They are the most important safe haven for global investors in times of turbulence. This special status could be called into question if there are more moments when they are extremely difficult to trade with. U. . S.. . Taxpayers could even be affected if investors ultimately demand additional compensation in order to own the debt. In the finance sector, clearing houses handle transactions between market participants. A CCP, as it is often called, effectively acts as a buyer for every seller and vice versa, reducing systemic risk by eliminating the likelihood of the other side getting a hit if the company fails on one side of a deal. They act as a firewall by raising funds to support every trade. So there is capital to make up for losses. In U. . S.. . Stocks and lots of derivatives, every trade is done in one which keeps the market stable by ensuring that all deals that are made are actually closed. But not in government bonds - which is scary during the turmoil - although this market is arguably more important for global finance as it controls the cost of borrowing for millions of home buyers, businesses and governments around the world. While the treasury market is back to normal and the trigger for the disruption, the pandemic, was a one-off event, the liquidity run in March was the second of its kind in less than a decade. The need to expand central clearing was also expressed after October. 15, 2014, "flash rally" where government bond prices rose rapidly and then fell for no apparent reason. However, no clearing changes have been introduced since then. Since the March episode, Fed officials including Vice-Chairman for Randal Quarles and Governor Lael Brainard have publicly pointed out an overhaul of the eviction as a possible solution. March was a wake-up call that structural adjustments may be required, Quarles said in October. "There would certainly be benefits in improving the way the treasury market works during a stressful and regular time," he told the Managed Funds Association. "There are many ideas," including the central clearing, which he described as "very worthy". Brainard cited “wider use of central clearing” in November as a reform to be considered. Powell brought up the subject this week. "We need to think about the structure of the treasury market and look for ways to ensure there is capacity for the private sector," he told reporters on Wednesday. “There may be a central clearing nook that carries a high level of risk. That has yet to be proven. There are a lot of things that are being looked at right now, ”he said, adding that he didn't see the Fed having a permanent role in the market. The Fed's intervention from March onwards was viewed by some as a bailout for hedge funds that had amassed in highly indebted treasury deals. If no changes are made, it could lead to persistent risk behavior as investors know the Fed will bail them out. This moral hazard problem is an even more important reason to reshape the treasury market to keep the Fed from having to intervene, Duffie said. An overhaul could get more attention under Joe Biden's presidency. During Barack Obama's tenure - when Biden was Vice President - Treasury Secretary Jacob J worked on it for two years. Lev. However, under Steven Mnuchin's leadership of the department, there has been no move towards more centralized clearing, despite advances in market transparency. Janet Yellen, the former Fed chairperson, could take over the baton when she becomes Treasury Secretary, as the last Democratic administration was more supportive of reform. While in normal times nobody questions the liquidity of benchmark government bonds, it has increasingly proven to be inadequate in times of need since the global financial crisis. Post-2008 regulations have restricted banks' willingness to hold stocks or increase their balance sheets. "The fundamental problem of flowing everything through dealer balance sheets becomes more of a problem over time," said Lou Crandall, a senior bond analyst with Wrightson ICAP. High frequency trading companies play a bigger role, but their treasury orders are often not handled through FICC. Most of the over $ 500 billion in government bond trading every day is bilateral and cleared, not at FICC, by a variety of companies, including the brokers themselves. Given that FICC has a head start in clearing between traders and in some corners of the repurchase market, many see it as the most likely company to undertake a broader centralized clearing initiative. The parent company, Depository Trust & Clearing Corp.. . already deletes everything that is in the U.. S.. . Exchange - Proof that it can handle the processing of an entire asset class. Not everyone sees central clearing as necessary or helpful. Chris Leonard, head of U. . S.. . Interest rate trading at Barclays Plc says the expansion in the repo market has not prevented problems there. Hence, its ability to support the cash treasury business “is questionable. "Even Quarles, who has spoken out in favor of expanding centralized clearing, is not confident that the Fed will completely eliminate the need to stop government bonds at times. ". "I'm not sure if that would have been the answer to what we saw in March and April," he said when investors were crazy about cash. Reforming the market has proven to be a tedious task in the past as the desires of Wall Street traders tend to contrast with those of new entrants such as automated traders. However, there is currently a very fragmented structure for a patchwork regulated market. "Given the different interests and incentives of market participants, as well as disagreements over how the costs and benefits of central clearing are shared, moving to central clearing would almost certainly require a regulatory fiat," said Ken Monahan, senior analyst for Market Structure and Technology at research company Greenwich Associates. The upheaval has triggered changes before. The 2008 crisis resulted in Basel III and the Dodd-Frank Act, which limited banks' leverage and supported their capital base. The relocation in October 2014 triggered the first review of the market structure since 1998. “The three building blocks that are required to modernize the treasury market structure are public reporting, monitoring of trading venues and central clearing. We can have a much more efficient and resilient market if Treasury Department reform gets a proper amount of attention in the years to come, ”said Stephen Berger, global director of governance and regulation at Citadel LLC, Ken Griffins Hedge Funds. “If not, the government’s emissions costs are ultimately higher than they should be. For more articles like this, please visit us on Bloomberg. comSubscribe now to stay one step ahead with the most trusted business news source. © 2020 Bloomberg L. . P. .
Investors pay after the short-term government bond auction to lend the country money
. . Some investors who bought Australian bills and Spain's benchmark bonds at auction are effectively paying the nations to hold their securities.
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