The US dollar’s liquidity is the biggest risk to financial market because of large declines in treasury yield since the 2007 housing bubble.
According to Bank of America, the US Treasury market is imperative for day-to-day functions. A hiccup in the market could have some lasting consequences and would be a major disruption.
The US Treasury market is essential for the stability of the financial system. The G30 report said that rates are a fundamental benchmark for pricing other assets, and this confidence is essential to securing it’s future.
The US Treasury market is in danger of a volatile period as its trading volume does not keep up with the growth of US Treasury debt.
Additionally, credit channels including loans and securities from the US government could be interrupted if the liquidity in the Treasury market is not happen for a period of time. This would lead to negative effects such as a potential government shutdown in the US. It is hard to imagine what other impacts this will have, such as on the dollar or financial markets.
The spillover effects will be dire if it is anything more than the popping of a housing bubble in 2007 that led to widespread job losses, foreclosures and deep global financial losses because liquidity in the housing market plummeted.
Many people have been consumed by this threat, which has shown little to no output.
With the increase in balance sheet roll- off, there are concerns about liquidity. This can be seen as the central bank is removing itself as a buyer of these securities to reduce its own risk. Other assets consist of US Treasuries and mortgage backed securities.
The Federal Reserve is a temporary solution to periods of market stress. It will eventually stop buying US Treasuries as the Federal Reserve is not an infinite source of funds.
BofA said that now is not a safe time for the US to depend on the Federal Reserve alone.
BofA believes a long-term solution to the economic crisis is to create not the Federal Reserve, but a “dealer of last resort” – a person or organization that can buy and sell assets when there is no other mutual agreement between buyers and sellers to trade.
BofA believes before a crisis occurs, there should be a dealer of last resort that offers a wide range of services to participants. The entity should be sponsored by the government and just like large international dealers, it will offer various products to the marketplace.