The nerves of fixed income investors have been frazzled by a series of events most commonly seen during market crises. Japan, the world’s third-largest economy, stepped in last week to defend the yen after the currency quickly fell to a 24-year low against the dollar. Just days later, the UK government’s plans for massive tax cuts triggered a historic sell-off in British currencies and the kingdom’s sovereign debt.

These international developments exacerbated a strong pullback in the US Treasury market, which accelerated after the Federal Reserve hiked rates by 0.75 percentage points for the third time last week and signaled further significant monetary tightening.

Yields on 10-year Treasury bonds , a key benchmark for global borrowing costs, jumped to nearly 4% from 3.2% at the end of August, in what is expected to be the biggest monthly increase since 2003 and an annual increase ever seen. The two-year yield, more sensitive to fluctuations in US monetary policy, has jumped 3.55 percentage points this year, also a historic gain.

Significant price fluctuations have made investors wary of trading in the market, which serves as the backbone of the global financial system and is generally regarded as a safe haven in times of stress.

Due to a lack of investors, liquidity in the Treasury bond market — the ease with which traders buy and sell — has deteriorated to its lowest level since March 2020, according to the Bloomberg Index. Poor liquidity tends to exacerbate price fluctuations, worsening volatility.

In a sign that tight conditions are holding back some fund managers, the US has seen sluggish demand this week with $87 billion in new debt placements.

Monday’s two-year bond issuance was priced at a high yield of 4.29%, while five-year bonds were priced at 4.23% the next day, both marking the government’s highest borrowing costs since 2007.

The two-year debt was sold with the largest difference – or „tail” – between what was expected immediately before the auction and its actual price after the market turmoil caused by Covid 2020, said Tom Simons, a money market economist at US Investment. Bank Jeffreys.

On Wednesday, the Treasury Department will auction $36 billion in seven-year bonds. The 7-year bond has struggled to attract demand in less volatile times, so this week’s situation could be a problem.