If a shock roils the Treasury market again, the Fed can use its playbook from March 2020 to deal with any emerging situation.
Of course, given today’s higher inflation, the Fed would not be enthused about adding dramatically to its balance sheet. But the market is aware that the Fed can intervene, and such measures could go a long way toward calming markets, if necessary. This response would only be a short-term solution, however, and not address the underlying structural concerns.
For example, when illiquidity and volatility spiked to extreme levels earlier this year in the U.K., the Bank of England only needed to purchase $21 billion worth of gilts in September and October to help settle the market. The withdrawal of a proposed tax cut package and the selection of a new prime minister also led to greater calm.
Investors should also remember that even if the Treasury market suffers from structural challenges that contribute to greater volatility, Treasury bills, notes, and bonds—backed by the full faith and credit of the U.S. government—remain the most secure investment instruments in the world.