The Treasury Department is working on bond market reforms, reflecting heightened uncertainty about the economic outlook, Treasury Secretary Janet Yellen said Monday.
The U.S. bond market, whose yields have risen in line with interest rates and the strength of the dollar against other currencies, is experiencing higher transaction costs and lower levels of liquidity, Yellen said, describing the bond market as the “foundation of the global financial system.
“We want to make sure that going forward, our Treasury markets remain deep, liquid and functioning well,” she said at an event in New York. “We are actively working to try to strengthen the functioning of this market in order to carefully consider what might be appropriate. I think the ability of brokers to get into this market — their ability hasn’t increased with the size of the market. So we’re looking at a number of ways to improve resilience.
“The second [Securities and Exchange Commission] is exploring central clearing initiatives,” she added.
The Treasury’s attention comes as yields on US 10-year bonds soared to 4.2% from 1.6% at the start of the year. Analysts say this is due to interest rate hikes coming from the Federal Reserve seeking to stamp out inflation, which has been above 8% for seven straight months.
High inflation and rising interest rates have led to huge swings in stock markets over the past few weeks. The Dow Jones Industrial average has jumped more than 9.5% since the end of September, but is still down nearly 14% on the year.
All the volatility has raised concerns about the fundamental stability of the highly connected global financial system, which has been rocked in recent months by factors ranging from lockdowns affecting labor markets in Asia to failed policy implementation. United Kingdom.
“To date, the US financial system has not been a source of economic instability,” Yellen said Monday. “As we continue to monitor emerging risks, our system remains resilient and continues to perform well despite uncertainties.”
Yellen also warned of potential problems in so-called shadow banking, a term that refers to financial institutions that act as moneylenders without being classified as banks.
“We are also mindful of the possibility that greater market volatility could reveal vulnerabilities in non-bank financial intermediation,” she said in her prepared remarks. “Since I arrived at the Treasury, financial regulators have worked together to better monitor the leverage of private funds and develop policies to reduce the first-mover advantage that could lead to market fund runs. money market and open-end bond funds.
The United Nations also warned against non-banking financial institutions in a recent report of its Conference on Trade and Development.
“Non-bank financial intermediaries perform many of the same basic functions as regulated banks, but they remain unregulated. The universe of non-banking financial institutions and credit providers, known as shadow banking, was in the spotlight at GFC [global financial crisis]“, said the group in its report.
“Largely unnoticed until then, the vast network of unregulated credit intermediaries, their opaque connectivity with official banks, and the hidden risks of those connections were at the epicenter of the global financial implosion,” the report said. the UN, noting that the 2008 crisis began in the relatively isolated segment of the US mortgage market, but quickly spread through shadow banking channels due to speculation by hedge funds.