The USA accounts for 39% of the bond market, which puts greater pressure and stress on the President. However the pandemic has exacerbated this for the next President of the United States.
The treasury market always strikes fear into the powerful. The stock of tradable bonds amounts to $20.5trn and is expected to match 100% of America’s GDP this year. Due to the dominance of the dollar, bonds are held by American banks, European pension schemes to Arab sovereign-wealth funds and Asian exporters. In addition to the strength of the dollar drives the purchasing of bonds from all over the globe. The ‘risk-free’ interest rate underpins the value of other assets such as mortgages to stocks. This ‘risk-free’ interest rate also leads to racier assets in times of stress, which has been seen during the pandemic.
With a high likelihood of a Republican-controlled senate, the yield of the treasury fell by 0.12% to 0.78% on November 4th. This may be due to the assumption that government spending will be decreased due to the shift of power from Democratic to Republican. The next President may be worried due to the risk of a tailback in the bond market, at a time where government borrowing is continuing to rise sharply compared to previous years. Also, the gap between the price at which you can buy a bond, and sell bond is 12 times its typical level.
Due to the pandemic investors holdings rose to 350%, from the typical 60-90% of the Treasury’s yield. Demands are clearly shown to have grown, however, this growth has been accelerated by accelerated this growth by a handful of firms that are allowed to buy bonds from the American government, they are referred to as the ‘primacy-dealers’, and have left the American government heavily dependent on them. After the financial crash regulations were tightened however these big firms, who are mainly banks, have the ability to make markets, and therefore this power may put the next president in a difficult position.
Overall, the bond market was seen unexpected spikes and problems and therefore scenarios show that radical intervention by the federal government will need to be put in place otherwise the large debt from Covid-19 will be extremely difficult to overcome over the next 10 to 15 years. Shama Daula
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