Market Extra: The next financial crisis may already be brewing — but not where investors might expect

by | Sep 14, 2022 | Stock Market

A growing number of traders, academics, and bond-market gurus are worried that the $24 trillion market for U.S. Treasury debt could be headed for a crisis as the Federal Reserve kicks its “quantitative tightening” into high gear this month. With the Fed doubling the pace at which its bond holdings will “roll off” its balance sheet in September, some bankers and institutional traders are worried that already-thinning liquidity in the Treasury market could set the stage for an economic catastrophe — or, falling short of that, involve a host of other drawbacks.

In corners of Wall Street, some have been pointing out these risks. One particularly stark warning landed earlier this month, when Bank of America
BAC,
-0.75%
interest-rate strategist Ralph Axle warned the bank’s clients that “declining liquidity and resiliency of the Treasury market arguably poses one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.” How could the normally staid Treasury market become ground zero for another financial crisis? Well, Treasurys play a critical role in the international financial system, with their yields forming a benchmark for trillions of dollars of loans, including most mortgages. Around the world, the 10-year Treasury yield
TMUBMUSD10Y,
3.418%
is considered the “risk-free rate” that sets the baseline by which many other assets — including stocks — are valued against. But outsize and erratic moves in Treasury yields aren’t the only issue: since the bonds themselves are used as collateral for b …

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