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Cracks Emerge in Treasury Bond Market as Fed Starts to Back Away

  • Fed is ending purchases that buoyed trading in off-the-runs
  • That’s spurred a revival of volatility and damaged liquidity
Updated on

Buying and selling large quantities of U.S. government debt without substantially moving the market is about the hardest it’s been since the pandemic sent markets reeling in March 2020. Volatility has jumped, failed trades have increased -- and Wall Street analysts warn that the Federal Reserve’s exit from bond-buying is set to make matters worse.

When markets seized up last year, liquidity in most Treasuries vanished, forcing the Fed to embark on massive asset purchases and other measures to avert a full meltdown. Now, the U.S. central bank is scaling back that buying, which has targeted the least-liquid Treasuries, and is poised to quicken the wind-down. At the same time, new government borrowing is ebbing, with the combination setting the stage for more fireworks.