As the screams of agony from macro hedge funds and CTAs have indicated, this month has been, well, mental for the Treasury market. It’s incredible what a small sudden banking crisis can do isn’t it?
First, some back-story: A weird anomaly about the US bond market is that Treasuries — arguably the single most important cornerstone of the global financial system — have long been one of the most opaque areas.
While dealers have long reported all municipal, corporate or agency bond trades within five minutes to the Financial Industry Regulatory Authority — which collects then in “Trace”, or the Trade Reporting and Compliance Engine, and disseminates them publicly — Treasuries were long exempt.
However, after a wild 2014 “flash rally” in Treasuries painfully exposed how little even regulators see in that market, US government debt has been slowly been forced into Trace.
And in a bit of luck, Trace switched from weekly to daily Treasury trading reporting on Feb 13 — just in time for this month’s banking crisis. Barclays has pored through the data, and they are wild.
Daily nominal Treasury volumes spiked to as high as $1.2trn on March 13 — the Monday after Silicon Valley Bank collapsed — and daily volumes have averaged as high as $1tn.
To put this in context, that is an even greater spasm of trading than what we saw at the peak of the Covid-triggered market panic in March 2020.
Most of the action has been in Treasuries maturing in three to five years, and, as you’d expect, dominated by on-the-run securities.
More recently, trading volumes in Treasuries maturing in two years or less have seen a sharp upswing in trading volumes — presumably as speculation grows around whether the peak in interest rates is in or not.
As you’d also probably expect, “interdealer” trading — primarily high-frequency trading firms that intermediate Treasury sales between banks — dominated the big spike in trading volumes around March 13.
But perhaps the most interesting data is around bid-ask spreads.
There has been much ink — real and digital — spilled on concerns over the liquidity of the Treasury market in recent years, some of which on Alphaville.
But it seems that despite a trading frenzy that surpassed that of March 2020, bid-ask spreads didn’t balloon nearly as violently this time. As this Barclays chart shows, it’s been more of a slow grind upwards in on-the-run bid-ask spreads since things settled down after Covid.
There was a more pronounced bid-ask spread jump in off-the-run Treasuries, but not nearly what we saw in March 2020 — when it was quite literally off the (Barclays) charts.
For reference, off-the-run spreads widened by over 2 basis points at the worst.
Does this mean that the Treasury market is not nearly as decrepit as some people have been saying? Probably.
But the data — especially those gradually increasing bid-ask spreads even for ultra-liquid on-the-run Treasuries — does show why more work is needed to reinforce the world’s most important financial market.
Further reading:
— How to save the Treasury market
— US Treasuries: the lessons from March’s market meltdown
— Non-fungible Treasuries and financial risk
Read the full article here