Observers outside the US frequently ask why markets haven't priced in material risks such as loss of Federal Reserve (Fed) independence, the US government taking ownership stakes in some companies and cuts of revenues from others. Or the extremely high tariffs that the US is applying to many imported goods, for that matter. The answer appears to be simply that with so much going on, markets are finding it easier to put on blinders and assume the best.
A few weeks ago, a Barron's article on the US government issuing a large amount of very short-term debt flagged yet another serious risk. This is the continuation of a practice started in the Biden Administration, which current US Treasury Secretary Scott Bessent had previously criticised.
Debt strategy drains Fed repo facility
The rationale for the policy is to take advantage of relatively lower rates on the short end of the curve for the very high level of debt issuance and to avoid driving up yields on the long end by flooding the market with longer-dated Treasuries.
This means the Treasury must continuously roll over the debt and issue new bills. The risk is that if rates were to go up, the debt would become more expensive (issuing longer-term debt enables the government to lock in rates for a longer period of time), driving up debt servicing costs.
The article also noted that this practice is having the unintended consequence of draining the reverse repo facility (a key Fed tool where financial institutions park excess cash overnight). It highlighted this could drain bank reserves at the Fed next because investors could get a higher yield on their cash by investing in short-term Treasury securities. We saw bank reserves fall to a low level back in September 2019, which caused liquidity issues for the market.
Need for skill and experience
This is another example of emerging risks that aren't getting enough attention. The 2023 regional banking crisis was quickly resolved thanks to the skilled and experienced professionals at both the Fed and Treasury, who reacted quickly and appropriately to contain the growing crisis, including creating a specific credit facility designed to address the issues facing those banks.
A key concern is whether there will be enough skilled and experienced government professionals available to address the crisis quickly and appropriately if any of these risks materialise.
Author: Kristina Hooper, Chief Markets Strategist at Man Group.
Forecasting Fury: Pricing the New Reality of Explosive Hurricanes
Hurricane Erin, the fifth named storm of the Atlantic hurricane season, intensified from a Category 1 hurricane on Friday 15 August, to a Category 5 major hurricane on Saturday 16 August.[1] Rapid Intensification (RI) is the term used to describe a windspeed increase of at least 30 knots (kt) over a 24-hour period.[2] In the case of Erin, the increase was 75kt, the fifth highest on record, and the informal term ‘explosive intensification’ captures what happened rather better.
For catastrophe bond investors, this trend poses new challenges. Looking at the chart, it is striking that the nine most extreme examples of RI occurred within the last 10 years. Increasing RI frequency is not just a visual artefact but is borne out by literature (at least for the Atlantic).[3] [4] RI is dependent upon warm sea surface temperatures (amongst other things), so it is no surprise that climate change is a driver.
Figure 1. Maximum intensification of named storms over any 24-hour window
Source: NOAA/NHC, Man Group database. As at 16 August 2025.
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While hurricane path forecasts are improving, forecasting intensity changes is even more challenging. The path of a hurricane is largely determined by the large-scale environment, whereas intensification seems to be also affected by much smaller-scale details in the hurricane’s core.[5] The presence of wind shear can either enable or inhibit RI, but it is not even known whether hot towers[6] in the core are causally related.
This is particularly problematic when RI occurs unexpectedly near land, since preparedness planning is a function of both landfall location and intensity and may then need to change rapidly. To put this in context, were a Category 1 to make landfall one might expect some roof damage and a few days’ power outage, whereas a Category 5 making landfall will destroy most homes, with total roof failure, wall collapse and the area being uninhabitable for weeks or months.[7]
Hurricane Milton (another ‘explosive intensification’)[8] demonstrated how relatively small course changes could lead to very different insured losses. RI introduces damage uncertainty as another level of complexity in insured loss forecasting.
How should an investor think about rapid intensification? The rising frequency of RI adds complexity to risk assessment, but the reality is that it sits alongside other non-stationary drivers of loss including sea temperatures, sea levels, and atmospheric conditions. Collectively, these impact the frequency and severity of storms making landfall. As a result, market pricing is not just a function of expected risk, but uncertainty in that estimate itself. We believe that diversification is the most powerful mitigant available, most notably by peril, geography, seniority and coverage type.
Authors: Andre Rzym, Partner, Head of Systematic Opportunities at Man AHL and Tarek Abou Zeid, Partner, Head of Client Portfolio Management at Man AHL.
All data sourced from Bloomberg unless otherwise stated.
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