The US Fed can help stabilize the market for Treasury bonds

America's central bank could reduce volatility if it wants to do so

- MOHAMED A. EL-ERIAN

Greater stability in US Treasuries is needed for the smooth functioning of other segments of the financial market, housing and the economy more broadly, both in America and beyond. Such stability is unlikely to be anchored anytime soon by either clarity about economic prospects or an abundance of volatility-repressing financial flows. What is needed is a policy anchor that, at this stage, must have a major monetary policy component.

To say that the US government bond market has been unusually unstable would be an understatement. Recent weeks have seen eye-popping intra-day moves in yields, uncertain auctions and periodic concerns about liquidity and financial stability. The Fed’s Financial Stability Report released on Friday addresses the issue of Treasury market liquidity, noting that it “is important because of the key role these securities play in the financial system." The analysis documents how liquidity has been below historical norms and “may be less resilient than usual."