Thu, March 28, 2024

The US Treasury Market Suffering Causes Liquidity Concerns

TheUS Treasury Market Suffering Amplifys Liquidity Concerns

A steep sell-off in US Treasuries has heightened fears about the $23.5 trillion market’s lack of liquidity; potentially compounding losses for investors who have already had a bad start to the year. Bond yields have risen this year as the Federal Reserve has become more hawkish about how aggressively it would raise interest rates to calm the economy; it put downward pressure on bond returns. The ICE (NYSE: ICE) BofA Treasury Index is off to its worst start in history; down 6% so far this year.

Liquidity in the US Treasury market has always been an issue; hence, dealers and investors say the recent sell-off has raised new concerns.

The market for Treasury Security

The market for Treasury securities is normally one of the most liquid globally; the instruments are used as a benchmark for asset classes by the global financial system. However, it had experienced liquidity issues in late February and early March 2020, when pandemic fears caused market disruptions and liquidity quickly deteriorated to levels seen during the 2008 financial crisis; which prompted the Fed to purchase $1.6 trillion in Treasuries to restore stability.

Investors believe liquidity issues haven’t reached the point where they’re affecting market functioning this year. Still, they’ve grown because of several things. One is that the Federal Reserve has stopped buying US Treasuries after discontinuing a bond-buying program aimed at bolstering the economy amid the coronavirus outbreak earlier this month. “We’re adjusting to the new world,” Al-Hussainy remarked. Some investors are also afraid that dramatic price movements in commodity markets because of the Ukraine conflict and sanctions against Russia, a major commodities exporter, might result in pockets of illiquidity in the financial system.

According to data, bid-ask spreads on short-term Treasury notes expanded considerably in March, indicating increased liquidity. Order book liquidity for Treasuries had decreased since February 24, when Russia launched its invasion of Ukraine, according to CME Group data, and volatility has increased.

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