Week InReview: November 19, 2021

Cutting to the chase.
(Nov 17) — Financial regulators [met] on Wednesday to address recent wild price swings in the U.S. Treasury market, presumably to find out why markets all of a sudden aren't working properly. But traders say that, once again, rules created in Washington are having unforeseen consequences.
The Volcker rule which limited banks from taking large proprietary positions limits the amount of risk and, therefore, the amount of inventory banks can keep on their books. In times of QE, that's no problem, the more supply the better. Bonds just kept going up as the Fed kept the cash coming.
But now, partly because of rising inflation expectations and partly because of the start of tapering, bonds have been falling and traders can't hold and trade them the way they used to. Frankly, given the biggest buyer of bonds since the financial crisis is slowing purchases, why would anyone else want them? The Fed not buying bonds is defacto selling.
This is the regulatory agencies' own doing and creating more rules to fix broken rules is not likely to help. Prices are volatile as traders try to trade the timing of the next rate hike. And if a central bank is eventually going to be trimming their balance sheet and removing liquidity it probably isn't too smart to take them on. I tried it with the BOJ once in the 80's, it did not end well.
Vincent Cignarella
— Bloomberg

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