Notebook.

Weekend Edition on Thursday!

News Items is off the grid for a few days. It returns on Tuesday morning (April 5th). Below are a few items that would have been in the News Items weekend edition. Except there won’t be a Weekend edition. So, there’s this.

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1. The return of “market function concerns.”

Investors’ ability to trade US government debt has deteriorated to its lowest point since the ructions of March 2020, deepening worries about the world’s most important bond market as the Federal Reserve tightens monetary policy.

Liquidity, or the ease of buying and selling, in US government securities has dropped since the beginning of this year, reaching levels not seen since the first months of the coronavirus crisis, according to an index compiled by Bloomberg.

The deteriorating trading conditions have exacerbated this month’s price swings, with investors increasingly concerned about how well the market will function as the Fed starts reducing the size of its $9 trillion balance sheet.

Treasuries are already on course to post their worst quarter since at least 1973 after the Fed raised interest rates for the first time since 2018 this month in its attempt to battle inflation, which is running at its highest level in 40 years. It has also halted its crisis-era bond-buying program.

At the same time, war in Ukraine has prompted several jolts of volatility in Treasuries in recent weeks. Such intense volatility is unusual and concerning in the $23 trillion market, widely considered the deepest in global finance, traders and investors say. (Source: ft.com)

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2. Irrational Exuberance.

U.S. home prices shows signs of becoming “unhinged from fundamentals” like they did in the housing bubble that preceded the 2008 crash, according to a blog post by the Dallas Federal Reserve bank.

“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s,” the Dallas Fed researchers wrote, citing data to measure “exuberance” on property markets that they’ve developed with scholars around the world as part of the International Housing Observatory. 

The measure suggests that “the U.S. housing market has been showing signs of exuberance for more than five consecutive quarters through third quarter 2021,” they wrote. The surge in home prices has continued since then. 

The Dallas Fed blogpost is worth reading in full. (Sources: bloomberg.com, dallasfed.org, int.housing-observatory.com)