Financial market anxiety has rebounded and the process of rebuilding confidence will be "long and slow," a top U.S. Treasury official said on Tuesday.
Speaking at a conference in Paris, Assistant Secretary for Financial Matters Anthony Ryan, the senior U.S. Treasury official in charge of debt management, also said foreign investors continued to show healthy demand for U.S. Treasuries.
"As we head into year end, we are witnessing a resurgence of risk aversion and continued impaired liquidity across the credit spectrum," Assistant Secretary for Financial Matters Anthony Ryan told a Euromoney financial markets conference in Paris.
"It will take additional time for markets to regain confidence, and we will likely witness more unforeseen challenges leading to more headlines and volatility as additional disclosures are made," he added.
Problems in the U.S. subprime mortgage market spurred a global credit crunch in August and wary investors have been back on the defensive in recent weeks, concerned that the housing slowdown could tip the United States into recession.
Ryan said the U.S. Treasury wanted to see orderly financial markets and that investors bore some of the burden for ensuring such an environment since they should do more to understand the risks associated with the instruments in which they invested.
Fending off criticism of U.S. Treasury Secretary Henry Paulson made by the moderator of the conference, Ryan stressed that efforts were being made to ensure some individuals were not artificially cut off from access to credit.
"We need to make sure we don't compromise economic vitality through some kind of systemic risk," he said.
Ryan noted the challenges that lay ahead but reiterated the U.S. government's argument that the credit market troubles were unfolding against a backdrop of strong global growth, which would benefit the U.S. economy.
"While the U.S. economy does face serious headwinds from a weak housing market and high energy prices in addition to current credit market conditions, solid economic fundamentals should support continued growth," Ryan said.
Ryan also cited solid corporate profits, the boost to U.S. exports from global growth, and contained core inflation as other factors which would be supportive for growth.
Recent tame readings on core U.S. inflation, which strips out volatile energy and food prices, has allowed the U.S. Federal Reserve to cut interest rates by 75 basis points since mid-September to 4.5 percent.
Investors expect the Fed to ease by at least another 25 basis points at their next policy meeting, on Dec. 11, to ward off further fallout from the housing problems.
Ryan confirmed the sector was still not out of the woods. "The correction in both home building and housing prices is still unfolding. The longer housing prices remain stagnant or fall, the greater the penalty to near-term economic growth and the bigger the effect on American families," he warned.
Quizzed about the dollar's recent slide to record lows against the euro, Ryan told the conference: "Secretary Paulson speaks on the dollar frequently, his message is consistent so I won't repeat that."
Appetite for Treasuries
The dollar has notched fresh record lows against the euro and pound since August, making U.S. exports cheaper for foreign customers and aiding the trade balance. It also erodes the value of dollar assets in foreign-currency terms.
Still there were no signs that overseas investors were being deterred from buying U.S. Treasuries, according to Ryan, who said the transparency and deep liquidity of the U.S. Treasury market was a key reason for such healthy appetite for the paper.
"We continue to see very real demand in interest and support for the Treasury market by non-U.S. investors. We welcome that."
Asked about the U.S. Treasury's issuance plans and whether any foreign-currency debt issues were planned, Ryan said: "We feel very comfortable with our existing range of instruments."