Central Banks Fuel Cycle of Crises with Market-Making

Central banks have become market makers of last resort, ensuring corporate and government debt markets function during crises. However, this support removes key risks, encouraging more borrowing, particularly from hedge funds that own trillions of US Treasurys.

Huw Pill, the Bank of England's chief economist, warns that this creates vulnerability by mechanisms meant to reduce it. 'It's a bit like a whack-a-mole kind of story.'

The scale is extraordinary: the Dallas Fed estimates hedge funds ended last year with $2.4 trillion in Treasurys, up from $600 billion a decade earlier.

Pill worries that central-bank policy boosts borrowing, keeping government-debt yields lower than they otherwise would be. 'There's lots of gilts to be bought,' he says. 'How do you support that buying of gilts? You make it attractive.'