Wall Street Chatter Grows That Fed May Act If Bond Rout Worsens
(Bloomberg) — There’s a growing discussion on Wall Street that the Federal Reserve may need to step in to stabilize the Treasury market if the rout that briefly propelled long-term US borrowing costs above 5% continues.
Mounting doubts about the safety of US assets due to US President Donald Trump’s escalating trade war deepened the selloff in Treasuries on Wednesday, lifting the benchmark 30-year yield to briefly touch 5.02%, the highest since 2023. Should such moves continue, the central bank will need to act, Deutsche Bank AG and Jefferies strategists said, although they differed on how the Fed might do that.
George Saravelos, Deutsche Bank’s global head of FX strategy, said the central bank needs to deploy a circuit breaker — namely emergency quantitative easing.
“If recent disruption in the US Treasury market continues, we see no other option for the Fed but to step in with emergency purchases of US Treasuries to stabilize the bond market,” he wrote in a note.
Such a move would be far from unprecedented. In 2020, policymakers slashed US interest rates and initiated a quantitative-easing program to inject huge amounts of liquidity into the market to limit the financial fallout from the outbreak of the pandemic. Two years later, the Bank of England stepped in to buy gilts and cap surging yields after former UK Prime Minister Liz Truss’s budget of unfunded tax cuts upended bonds.
Meanwhile, Jefferies’ Thomas Simons says that with volatility surging in Treasuries, “we do not think we’re too far away from stabilizers coming in.”
But his view is that quantitative easing is the wrong way to address the situation.
“Mass purchases of Treasuries might raise questions about the monetization of debt in the US, and further weaken the market’s appeal among foreign investors,” Simons, a senior economist, wrote Wednesday. “We do not expect that the Fed will start buying bonds again any time soon.”
He suggested the Fed may be better off turning to tools it used in past crises, including 2020.
One potential step, which it took in April 2020, would be to exempt Treasuries and deposits from banks’ supplementary leverage ratio. The move would help dealers expand their balance sheets and hold securities others are selling, said Simons. He wrote that he expects an announcement on this front could come as soon as Wednesday depending on what happens with markets.
“In our view, returning to this policy would be a big help in stabilizing the Treasury market before conditions deteriorate to the point where more intervention is needed,” he wrote.
Still, the Fed has given no indication that it is close to acting — either to support liquidity or to lower rates.
Fed Seen on Sidelines for Now as Volatility Roils Global Markets
Such a move by the Fed could calm the market in the short-term, but Saravelos says a reversal of the Trump administration’s policies would be necessary to stabilize medium-term shifts.
Those include a slide in the dollar that Deutsche has described as a crisis of confidence in the currency — long seen as a haven in troubled times.
Instead of piling into the greenback, international investors are de-dollarizing in a shift that’s playing out “at a faster pace than even we would have anticipated,” according to Saravelos. The dollar was selling off against most major peers in another day of volatile trading on Wednesday.
“The market has lost faith in US assets, so that instead of closing the asset-liability mismatch by hoarding dollar liquidity it is actively selling down the US assets themselves,” he said.
(Adds commentary from Jefferies)
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