Debt Market Distortions Go Global as Nothing Makes Sense Anymore

Across developed markets, the conventional relationship between government debt -- long considered the risk-free benchmark -- and other assets has been turned upside-down.''

in many ways, it reflects the unintended consequences of post-crisis rules designed to make the financial system stronger. Those changes have made it cheaper and safer to use derivatives to hedge risk, and more onerous and expensive for bond dealers to make markets in the safest securities...

... in many ways, it reflects the unintended consequences of post-crisis rules designed to make the financial system stronger. Those changes have made it cheaper and safer to use derivatives to hedge risk, and more onerous and expensive for bond dealers to make markets in the safest securities

... [An example is] the so-called supplementary leverage ratio, an addendum from U.S. regulators to global capital regulations known as Basel III. In one part of the provisions, government bonds are considered just as risky as corporate debt. That's made banks less willing to own sovereigns and pushed them toward swaps, which eat up less cash and aren't subject to the same capital requirements. U.S. commercial banks cut their Treasury holdings for the first time in two years in the three months ended September, even as their total government debt positions, including those backed by federal agencies, have continued to rise, Fed data show.

... [But] "The role of the bond market is to provide funding at the right rates for the real economy," Major said. "That's why the bond market exists -- to help efficiently finance projects, businesses etcetera. If that efficiency is undermined, it's not going to be a positive thing for the economy."