Yellen talks about US debt: Liquidity is interrupted, and trust is being lost

The Zhitong Finance App learned that former US Treasury Secretary Janet Yellen pointed out that the recent wave of US debt sell-offs reflect a worrying decline in market confidence in US policymaking, but this is not a market failure requiring intervention by the Federal Reserve.

In her speech on Monday, Yellen said, “I don't think we are seeing a market failure, that is, a situation where market liquidity is completely exhausted, but current trends suggest a loss of market confidence in US economic policy.” This trend is “indeed very worrying.”

Yellen stepped down as finance minister in January of this year. Like many market participants, she noted that it was unusual for US Treasury yields to coincide with the depreciation of the US dollar last week. She pointed out that this dynamic shows that “investors are beginning to avoid dollar-denominated assets” and “questioned the safety of US debt, which is the cornerstone of the global financial system.”

Yellen, who was the chairman of the Federal Reserve, said that if financial stability is indeed at risk, the Federal Reserve is capable of intervening, just as the Federal Reserve introduced liquidity support tools in the early days of the COVID-19 pandemic in March 2020.

Speaking about financial stability risks, she said, “What needs to be clear is that I haven't seen these risks actually occur yet, and I hope they won't.”

Yellen also said she was pleased that the 10-year and 30-year US Treasury bond auctions “went smoothly” last week.

The former finance minister believes that China is unlikely to sell off its holdings of US Treasury bonds. China is the second-largest overseas holder of US Treasury bonds.

She explained, “If China sells dollar assets, it will push up the RMB exchange rate and pose risks to the US treasury bond market and global financial stability, and these risks will also damage China's own interests. This will be a very serious escalation of the situation. So I don't think China would do that.”

Yellen also mentioned that the risk of the US economy falling into recession “has risen sharply,” but she also said, “I don't want to predict a recession yet.”

Meanwhile, in the context of the Trump administration's imposition of tariffs, the Federal Reserve needs to pay close attention to inflation expectations. Yellen believes that the Federal Reserve “is unlikely to cut interest rates.” “The tariff policy and the uncertainty it brings have created an extremely difficult situation for the Federal Reserve,” she said.