Yields eventually will rip higher due to issuance not inflation

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BOSTON (Reuters) – U.S. bond market participants are worried market liquidity will keep deteriorating as the U.S. Treasury continues to issue large amounts of debt to back deficit spending while dealers struggle to keep up with the ballooning size of the market.

Liquidity – or the ability to trade an asset without significantly moving its price – has worsened over the past few years. U.S. government bond prices have fluctuated sharply since the Federal Reserve started hiking interest rates to tame inflation and the issue was discussed during several panels at the Fixed Income Leaders Summit event in Boston on June 13-14.

Regulators and the Treasury itself have launched a slate of reforms to improve trading conditions and avoid disruptions in the world’s biggest bond market, the bedrock of the global financial system. Still, many are concerned that vulnerabilities that emerged in previous incidents, such as in March 2020 when liquidity rapidly deteriorated amid pandemic fears, could still reappear in case of spikes in volatility and as demand struggles to keep up with supply.


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