US Treasury bonds are vitally important to the financial system: they’re not just the ultimate “risk-free” asset, they also act as collateral for loans and are used to price almost all financial instruments. It’s essential, then, that they remain well-behaved.
Only they haven’t lately.
The volatility of Treasuries (blue line) has been high for months and in the past week has soared to levels not seen since the start of the global financial crisis in 2008. On one hand, it indicates that bond investors are more worried about the big picture. On the other, it reflects that funding markets are stressed and not functioning as well as they should.
This matters: volatile bond markets lead investors and companies to take fewer risks, which in turn reduces liquidity. And that sends ripple effect
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With all this volatility, you may want to write that useful old adage down.
These spreads have widened, foreshadowing volatile days ahead.
Here’s what happened, and what to watch for as market worries widen.