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Thursday, December 2, 2021

Treasury market liquidity drought accompanied by unexpected rebound




The trading environment in the $22 trillion US government bond market has become less hospitable, exacerbating the volatility of securities that are the foundation of the global financial system.

Data shows that liquidity-investors can easily buy and sell assets-has deteriorated in recent weeks. This has increased pressure on regulators to improve a market that has long been seen as a safe haven in times of trouble.

However, according to a progress report released this week by a federal task force responsible for assessing the structure of the US Treasury market, regulators are far from having any solution.

this reportIt is part of a review commissioned after the U.S. Treasury bond market fell into chaos at the beginning of the new crown virus pandemic, detailing the reasons for liquidity problems in recent years. It also outlines some familiar solutions, such as increased transparency and supervision, and central clearing.

However, it did not make any policy recommendations or a work schedule.

Yesha Yadav, a professor at Vanderbilt School of Law who studies the regulation of the Treasury market, said: “The report is not enough to support the normal operation of the Treasury market, and it is not enough to ensure that liquidity providers will Will continue to trade.”

The report was released when the liquidity situation deteriorated again. Demand for Treasury bonds has risen in recent days, causing the price of 30-year Treasury bonds to soar to their highest level since July. The price of the benchmark 10-year bond has risen to its highest level since September.

The current price increase is counterintuitive. The Fed announced last week that it intends to slow down its purchase of US Treasuries during the pandemic, which will mean the withdrawal of the market’s largest buyer. The current demand for these safe-haven securities is so high and there is no clear basic economic reason: the October U.S. employment report showed strong employment growth, coupled with higher risk assets such as stocks that are booming.

“This seems to have to send some kind of disturbing signal to the governor of the central bank because it is not fundamentally driven. Subadra Rajappa, head of US interest rate strategy at Societe Generale, said in our speech At this time, it is clear that some’position loosening’ is taking place.

The line chart (percentage points) of the difference in the yield of 10-year Treasury bonds between August 2021 and February 2021 shows that the liquidity of the Treasury bond market is deteriorating

This kind of “closure” means that speculators are eager to get rid of the bet that the price of longer-term Treasury bonds will fall. Such transactions have been popular in recent months, but the unrelenting rise in prices has hit hedge funds including Rokos Capital Management, Alphadyne Asset Management, and Odey Asset Management.

As investors withdraw from these short positions, liquidity has been deteriorating, making the trend even more extreme. JP Morgan Chase’s research on November 5 showed that market depth, an indicator of liquidity, has fallen to its lowest level since the summer, when concerns about the impact of the Delta variable on the US economy hindered liquidity.

Another way to measure liquidity is to look at the difference in yields between recently issued securities (10-year bonds issued in August, which are usually very liquid) and older securities that are usually less traded. Since late October, this spread on 10-year US Treasury bonds has risen sharply.

Kevin McPartland, head of market structure research at Coalition Greenwich, said that liquidity issues have been a factor in recent price volatility. “You can see it throughout October. You can even see it today,” he said.

McPartland pointed out that the ICE BofA Move index, which measures the volatility of the U.S. Treasury market, is still at a high level last week after hitting its highest level since the coronavirus first disrupted the market in March 2020.

“Volatility is greater because of greater uncertainty. Liquidity issues are closely related to this,” said Christina Hooper, chief global market strategist at Invesco USA.




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