The Looming Sovereign Debt Crisis

Every once in a while, we get to the point in financial markets where all that matters is...wait for it...you guessed it...BOND MARKET LIQUIDITY. In the simplest terms, there are not enough willing buyers to scoop up US treasuries. Or any government bond for that matter. Least of all, as was this week, British government debt. So dire did circumstances become in London that the Bank of England was forced to ease again and become the buyer of last resort. At the death, many pension funds were saved that otherwise would have gone out with the tide.

But how did we come to this road? With the benefit of hindsight, or the foresight that very few had (like Joseph Wang), it all appears to be the work of quantitative tightening. With the Federal Reserve no longer buying treasuries with abandon, another buyer must emerge. But no such buyer exists, at least not at the margin or at least not at this scale. Tack on the global shortage of dollars needed by foreign central banks to service dollar denominated debt. And we get EPIC volatility.

Some Finance Twitter experts like Lyn Alden have long argued that this dynamic is the real test for Central Banks. They might ideally like to keep tightening until inflation softens to 2%. But what might in the end trigger a pivot first is actually disorder in sovereign debt markets. The actual market that matters for all other markets.