Nothing makes sense anymore in global debt markets..

A team of Bloomberg columnists have this piece on global debt markets:

Something very strange is happening in the world of fixed income. Across developed markets, the conventional relationship between government debt — long considered the risk-free benchmark — and other assets has been turned upside-down.

Nowhere is that more evident than in the U.S., where lending to the government should be far safer than speculating on the direction of interest rates with Wall Street banks. But these days, it’s just the opposite as a growing number of Treasuries yield more than interest-rate swaps. The same phenomenon has emerged in the U.K., while the “swap spread” as it’s known among bond-market types, has shrunk to the smallest on record in Australia.

Part of it simply has to do with the fact that investors are pushing up yields on Treasuries — which guide rates for just about everything — as the Federal Reserve prepares to raise borrowing costs for the first time in a decade. But 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.

“These kinds of dislocations can be expected to grow over time,” said Aaron Kohli, a fixed-income strategist at Bank of Montreal, one of 22 primary dealers that trade directly with the Fed. “The market structure and regulatory structure has evolved in a period with very low volatility. Once you take that away, it’s not clear what the secondary implications of that will be.”

What crazy times..

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