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Bloomberg
A $ 21 Trillion Treasury Mystery Is Haunting Global Markets
(Bloomberg) – Bond traders have been saying for years that there is liquidity in the world’s largest bond market, except when you really need it. Last week’s surprising twists in U.S. Treasury yields. The US can offer a new endorsement of that mantra and provoke another fight. of soul-searching in a $ 21 trillion market that forms the foundation of global finance. While stocks are prone to sudden swings, these episodes are supposed to be few and far between in a government debt market that sets the benchmark risk-free rate for much of the world. a mystery since no two events are the same. Some point to an increase in banking regulations in the wake of the 2008 financial crisis. Scrutiny on liquidity shortfalls intensified in October 2014 when there was a 12-minute drop and yield rebound with no apparent trigger. The sales panic during the pandemic-fueled chaos a year ago, exacerbated when the leveraged bets of hedge funds exploded, brought the issue to the fore again. And then came last week, when the gap between the offer and offer prices of 30-year bonds hit. The broadest since the March 2020 panic. The latest events “are a stark reminder of what happens when liquidity suddenly disappears in the deepest, largest bond market,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors. if this vast market is more vulnerable to sudden episodes of turbulence thanks to measures that have made it difficult for banks to hold Treasuries. Some analysts say last week’s tumult was magnified by questions about whether the Federal Reserve will extend a loosening of bank capital requirements, which is scheduled to end on March 31. Implemented at the beginning of the pandemic, the measure is believed to facilitate it. The 2014 episode caused a deep dive into the market structure, and regulators have pushed for some changes, such as greater transparency, and speculation has grown that further steps may be taken to strengthen the market structure. “While the scale and velocity of flows associated with the impact of COVID are likely to be quite far down the tail of the probability distribution, the crisis highlighted critically important vulnerabilities in the Treasury market that warrant careful analysis.” said Fed Governor Lael Brainard. Monday in prepared remarks to the Institute of International Bankers. There are many potential culprits in last week’s bond market crash, which since m mostly invested: from improving economic readings to more technical drivers. The Fed’s extremely loose policy and the prospect of new fiscal stimulus in the United States have investors betting on faster growth and inflation. Add to that a wave of convex hedging, and relaxation from big trend-following investors like commodity trading advisers. Conditions recently worsened, although it was nothing like what was seen in March. For Credit Suisse strategist Zoltan Pozsar, the action started in Asia with bond investors reacting to perceived aggressive signals from Australian and New Zealand central banks. That sentiment later carried over to the US when carry trades and other leveraged positions in the bond market were phased out. A disastrous auction of seven-year notes on Thursday added fuel to the collapse. Last week’s drama “recalls other notable episodes in recent years in which the deterioration of the microstructure of the Treasury market was the main culprit,” JPMorgan & Chase Co. strategist Henry St John wrote in a note with His colleagues: A key indicator of Treasury liquidity, market depth or ability to trade without substantially moving prices, plunged in March 2020 to levels not seen since the 2008 crisis, according to data compiled by JPMorgan. That severe degree of liquidity shortfall did not reappear last week. The bond market crash only briefly affected stock prices last week, and stocks began to rise this week, following a sharp drop in Treasury yields amid end-of-month purchases. The Fed cut rates to near zero in March 2020, launched a series of emergency loan facilities, and increased bond purchases to ensure low borrowing costs and smooth market operations. That disruption in operation has prompted calls for change from both regulators and market participants. GLOBAL VISION: Recovery? Yes. Tantrum? No. Yield controller model For now, Treasuries have stabilized. Pozsar notes that the jump in returns has provided an opportunity for some value investors to rush in and get an additional return, effectively helping to offset the impact of leveraged investors who rushed out last week. positions, ”Pozsar said in an upcoming episode of Bloomberg’s Odd Lots podcast. “It’s not comfortable, especially if it’s on the wrong side of the deal, but I don’t think we should go down a path where we should redesign the Treasury market.” Why liquidity is a simple idea but Hard to pin down: QuickTake (updates with details on the Bloomberg liquidity index in the 10th paragraph and a chart) For more articles like this, visit us at bloomberg.comSign up now to stay tuned cutting edge with the most trusted business news source. © 2021 Bloomberg LP
