ISTANBUL

Treasury market liquidity conditions in the US have "remained orderly" despite shocks to the American economy, Nellie Liang, undersecretary for domestic finance at the Treasury Department, said Thursday.

"Despite the various shocks and stresses that emerged during this year, Treasury market functioning has been orderly," she said at the 2023 Treasury Market Conference.

"We’ve seen lower levels of demand from commercial banks," she said. "Adding to this dynamic are growing estimates of Treasury’s borrowing needs from the private sector, because of higher projected fiscal deficits or the Fed’s quantitative tightening lasting longer than expected."

"In addition, we’ve heard that the correlation of stocks and bonds turning positive may be a contributing factor, as market participants may view Treasury securities as providing a less effective hedge for risky assets when the nature of shocks to the economy changes from predominantly demand shocks to supply shocks," she said.

Liang noted that the Federal Reserve increased the target range for the federal funds rate to 5.25% to 5 -5% and the 10-year Treasury yield touched 5% last month.

"The interest rate increases have been punctuated by financial sector stresses and geopolitical risks that have emerged in the interim, and volatility measures for Treasury yields have been elevated and variable," she noted.

The 10-year US Treasury yield climbed above 5% on Oct. 23 for the first time in more than 16 years. It was down to around 4.45% as of Thursday.