A $ 21 trillion Treasury mystery is affecting global markets

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Bond traders have been saying this years that there is liquidity in the largest bond market in the world, except when really I need it.

Last week Surprising twists in U.S. Treasury yields may offer new support for this mantra, and spark a new soul-seeking attack in a $ 21 trillion market that forms the basis of global finances. While stocks are prone to sudden changes, these episodes are supposed to be scarce in a public debt market that sets the risk-free benchmark for much of the world.

However, discordant movements occur periodically in the Treasury, forming a bit of a mystery, as no two events were alike. Some point to an intensification of banking regulations as a result of the financial crisis of 2008. The examination of liquidity deficiencies intensified in October 2014 when The drop and rebound of 12-minute yields occurred without an apparent activator. The panic sale during the chaos caused by a pandemic a year ago, aggravated when the leveraged bets of hedge funds exploded, highlighted the issue.

And then came last week, when the the difference between the bid and offer prices of 30-year bonds was the widest since the March 2020 panic.

Recent events “are a reminder of what happens when liquidity suddenly disappears into the larger and deeper bond market,” said Ben Emons, CEO of global macro strategy at Medley Global Advisors.

The question is whether this vast market is more vulnerable to sudden turbulence crises thanks to measures that have made it difficult for banks to hold treasury. Some analysts say last week’s uproar widened with questions about whether the Federal Reserve will expand the reduction in bank capital requirements, i.e. which will end on March 31st. Launched at the beginning of the pandemic, the measure is considered to make it easier for banks to add finance to their balance sheets.

The 2014 episode sparked a delve deeper into the market structure and regulators have driven some changes, such as increased transparency and speculation has grown about the possibility of further steps to strengthen the market structure come in.

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“While the scale and speed of flows associated with the COVID shock are likely to be quite far from the probability distribution, the crisis highlighted vulnerabilities in the Treasury market of great importance that warrant careful analysis,” he said. said Fed Governor Lael Brainard. Monday in statements prepared at the Institute of International Bankers.

There are plenty of potential culprits in last week’s bond market crash, which has since been invested primarily, from improving economic readings to more technical boosters. Extremely weak Fed policy and the prospect of a new U.S. fiscal stimulus are driving investors to bet on faster growth and inflation. Add to wave of convexity and disconnection hedges by large investors following the trend, such as commodity trading advisors.

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Based on the Bloomberg U.S. government securities index, an indicator of the extent to which returns deviate from a fair value model, liquidity conditions have recently worsened, although not ‘resembled what was seen in March.

For Zoltan Pozsar, a Credit Suisse strategist, the action began in Asia with bond investors reacting to perceived signals from the central banks of Australia and New Zealand. This sentiment moved to the United States as carry-over operations and other leveraged positions in the bond market ended. A disastrous one Thursday’s seven-year ticket auction added fuel to the unraveling.

Last week’s drama “recalls other notable episodes in recent years in which the deterioration of the Treasury market microstructure was primarily to blame,” wrote Henry St John, a strategist at JPMorgan & Chase Co., in a note with the his colleagues.

A key indicator of Treasury liquidity: the depth of the market or the ability to trade without moving prices substantially – fell in March 2020 to levels not seen since the 2008 crisis, according to data compiled by JPMorgan. The severity of the liquidity deficit did not resurface last week.