On April 9th, US financial markets faced one of the most tension moments since the global financial crisis in 2008. stock prices have been eaten for weeks, but the biggest surprise came when the American bond market, which is the safest investment tool in the world, has begun in violent vibration.
The return on US Treasury bonds increased for 10 years to 4.5%, after it was only 3.9% a few days ago, which means that the prices of the bonds themselves collapsed sharply. This synchronization between the collapse of risky assets and that safe has threatened to cause a comprehensive destabilization of the entire financial system.
However, at the end of the day, US President Donald Trump made a sudden statement temporarily turning the equation: it was announced that the implementation of a number of customs duties that were the direct cause of panic in the markets were postponed for a period of 90 days. The result was a strong rise in stock markets, as the Standard & Poor’s 500 index closed 10%, which is the highest daily gain since 2008. Although bond returns remained high, tensions in the rest of the markets have calmed down a little, which reduced the risk of financial infection.
Deep disturbances and repetition of previous crises
What happened was not just a passing wave, according to a report by Economist, but rather an embodiment of the increasing fragility of the US market infrastructure.
The Economist Magazine indicated that the fluctuation indicators have increased to unprecedented levels, as anxiety prompted investors and risk managers in banks and hedge funds to reduce their financial positions collectively. These collective moves may cause what is known as a “coercive sale” that increases the collapse of prices, as it happened shortly in gold prices when everyone rushed towards liquidity.
The most anxious thing was the similarity of what happened with the 2020 crisis in the beginnings of the Corona Kurona (Kovid-19), when the American bond market witnessed a severe shortage of liquidity, which made the difference between purchase and sale prices widely expanded, and the market became unable to absorb large demands. At that time, the federal reserve enters strongly by buying huge amounts of bonds to restore stability, a precedent that has become a reference at such times.
Other indicators emphasized the size of the crisis, including the breadth of the “exchange differences”, that is, the difference between the returns of treasury bonds and the expected interest rates. These differences amounted to 0.6 percentage points, which is a record level indicating the reluctance of investors from buying bonds amid uncertainty, according to Martin Whiton, a market analyst at the Australian Westback Bank.
A vicious episode .. from demands to collapse
These pressures led to a massive “margin claim” wave of banks on their customers from the hedge funds, which are the amounts that must be paid to cover the losses of open financial centers. With the decline in the prices of bonds and gold, these funds were forced to sell additional amounts of assets to provide liquidity, causing the frequency of landing. This scenario is known as the perishing ring, which is repeated when the losses push more sales, and sales lead to more losses.
Economist adds that this exactly happened in Britain in 2022, when pension funds were forced to sell huge amounts of British government bonds to meet marginal demands, which led to a sharp rise in returns and the Bank of England was forced to intervene.
One of the most prominent factors that increased the complexity of the situation is the adoption of a large number of hedge funds on what is known as the “gap trade”, a mechanism that is based on exploiting the price differences between the treasury bonds and its futures. This trade is profitable at stable times, but it is very dangerous when unexpected movements occur in the market, especially since the volume of open exposure in these deals amounted to about a trillion dollars, according to the report.
One of the directors of hedge funds described this mechanism by saying: “It is similar to capturing currencies in front of a motor machine … the profits are small, and the losses may be destroyed if things go reflect expectations.”
The federal intervention and its political score
And if the situation exacerbates again, the federal reserve will be forced to intervene again, as he did in 2020. But this time, the Foundation will face a complex political dilemma: Will it intervene to protect financial stability? Or is she trying to hide weak confidence in American debt?
The markets have begun the debts of the US government as more risky, in light of what Economist described as “the collapse of confidence in American economic policy makers”, as a result of Trump’s trends that turned the global trade system upside down.
Although Trump announced the postponement of customs duties, trade tension with China is still at its highest level, which leads investors to fear of high inflation and slowdown, that is, the worst scenario known as “inflationary stagnation”, which limits the federal ability to reduce interest.
Confidence is missing … and the risks are continuing
Economist concluded its report with a clear warning of relaxation in the face of this situation, saying that “the greatest threat is still politically.” While some customs restrictions were postponed, the actual barriers between America and its commercial partners, especially China, are still standing and even rising.
The magazine adds: “It will be naive to believe that the shock has ended, or that the confidence of foreign investors in American assets can be simply restored … The real question now is: How many shocks can this financial system bear it before it collapses completely?”
