Bond turmoil

Good morning, team. I'm Phil Rosen. 

The long-awaited Ethereum merge event, which experts say will ramp up energy efficiency on that blockchain by 99%, has been finalized, co-founder Vitalik Buterin said in a Twitter post. 

Top financiers have talked about it all week at the SALT conference in New York. 

One macro investor said the merge parallels the corporate governance structure seen in securities, Insider's Laila Maidan writes, while another exec said the event could spark mass confusion.

Read our correspondent's breakdown here.

The stock market, meanwhile, is still recovering from Tuesday's bludgeoning, with the S&P 500 just barely eking out a gain after its biggest one-day drop in two years. 

But it's not just equities and crypto that are churning this week.

Below, I'm breaking down what you want to know about the bond market — and why it's seeing some of its most dramatic volatility since the 2008 financial crisis.

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1. Most investors are watching the Fed's interest rate hikes, but policymakers' balance sheet plans might have an even bigger impact on markets. 

The central bank has committed to reducing its balance sheet, which mostly consists of US Treasury bonds and mortgage-backed securities.

During the pandemic, the Fed ramped up purchases of those bonds and securities, as well as corporate debt, in an effort to keep credit markets open. 

At the time, the move worked — but it ballooned the Fed's balance sheet from about $4 trillion to about $9 trillion today. 

Now, as Jerome Powell moves to unwind those holdings, trading liquidity in government bonds has declined significantly since April. 

Bloomberg's US Government Securities Liquidity Index is currently showing "stressed" conditions, and is already sitting at precarious levels last seen at the height of the pandemic and on par with the 2008 crisis. 

"The Fed may be creating different problems this time. Trading liquidity has been steadily getting worse all year and rivals the worst of the March 2020 period. Corporate distress has also risen," Ned Davis Research said in a note.

That bond market volatility is beginning to bleed into the stock market, according to analysts.

"Realized volatility is almost seven percentage points above its historical mean, while implied is nearly four points above its mean," NDR said. "You have to go back to the Great Financial Crisis and the European sovereign debt crisis to find comparable levels before the pandemic."

Last week, Bank of America said declining liquidity in the Treasury market represents the largest systemic risk to financial markets. 

Falling liquidity and resiliency of US Treasurys, BofA said, could be a bigger risk to stocks than the 2007 housing bubble.

How are you adjusting your investments to account for market volatility? Let us know in the comments.

In other news:

2. Here are six places to invest your money after August's inflation reading shocked the stock market. The S&P 500 shed 4.3% on Tuesday following the hotter-than-expected CPI report. Three market experts explained their bets on where to stow your cash.

3. Goldman Sachs just revealed new stock market and economic growth forecasts. The analysts included a downbeat "recession scenario" for the S&P 500, as well as what the index was likely to do in two possible landscapes. The bank recommends these 12 stocks if the bleaker scenario comes true. 

4. This 33-year-old paid off $45,000 in debt and now teaches women how to take control of their finances. Focus on spending better instead of just spending less, according to Laurie-Annie King. She explained how the "aligned money method" can help dig you out of debt.

5. Lumber prices dropped Wednesday after rallying earlier in the week. The potential for rail strikes sparked fears of a supply disruption for the key commodity — and mortgage rates topped 6% for the first time in 14 years, spelling trouble for housing demand.

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This newsletter was curated by Phil Rosen.