Troubles Percolate in the Plumbing of Wall Street

For instance, when stocks fall sharply, prices of U.S. government bonds — the haven of choice for global investors — should go up, helping to mitigate the losses on stocks. But on Wednesday, that did not happen. As the S&P 500 collapsed, bond prices fell sharply too — pushing yields, which move in the opposite direction, up — and breaking down perhaps the most basic relationship in markets.

“The sun rises in the east,” said Ajay Rajadhyaksha, an analyst with Barclays in New York and a member of the Treasury Borrowing Advisory Committee to the Federal Reserve Bank of New York, a group of top Wall Street executives who advise on conditions in the Treasury market.

“You also know when things go bad, Treasuries rally, and if they don’t, that is incredibly problematic.” He added: “That’s when you begin to get concerned about whether markets are breaking down.”

The Fed has fixes if the problems persist. It could reinvigorate the crisis-era term auction facility, through which the central bank auctioned 28-day and 84-day loans to some deposit-taking institutions to help ease funding strains. It could make the currency-swap lines it has in place with other global central banks more attractive, ensuring that foreign markets have plenty of dollars flowing through them.

Or it could even take a page out of its November 2008 playbook and buy assets for purely technical reasons, to make sure that they continue trading smoothly, some economists said. Back then, the Fed jumped into the mortgage-backed security market, providing an escape valve for rapidly building pressure.

Already, the Fed is buying $60 billion in Treasury bills each month, so some have speculated that it could simply extend that program, which is slated to run through at least April before tapering off on an as-of-yet undetermined schedule.

The question is what would be most helpful — and because it is hard to know exactly what is going on, that is a matter up for some debate.

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