bonds Markets volatility

Liquidity May Be Disappearing In The Most Liquid Market On Earth

"In our view, the significant drop in rates market liquidity is not temporary".

"In our view, the significant drop in rates market liquidity is not temporary".
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3 comments on “Liquidity May Be Disappearing In The Most Liquid Market On Earth

  1. vicissitude

    Re: ” thanks in part to the flood of supply, auctions are now “risk events as opposed to liquidity events”, Zhang frets. The following chart shows the disturbing trend from July onward.”

    Who knew that an on-going tsunami of Treasury issuance would be a problem? Who could have guessed that if Treasury screwed up the way it normally issues debt in a regular and predictable pattern, there would be a problem?

    Random tidbit: Management and Performance Challenges Facing the
    Department of the Treasury (OIG-CA-20-005

    To further complicate matters, Treasury must also operate in the repeated cycle of budget and debt ceiling stopgaps. Legislation was passed in February 2018 to suspend the statutory debt limit
    through March 1, 2019.6 Because no long-term solution had been found, the U.S. debt limit was
    reinstated at $22 trillion on March 2, 2019. When the statutory debt limit was reinstated, Treasury
    immediately implemented extraordinary measures to prevent the United States from defaulting on
    its obligations. Measures included (1) suspending State and Local Government Series securities
    sales, (2) declaring a “debt issuance suspension period” which suspended additional investments
    in the Civil Service Retirement and Disability Fund and Postal Retiree Health Benefits Fund, and
    (3) suspending investment in the Government Securities Investment Fund of the Federal
    Employees’ Retirement System Thrift Savings Plan. In July 2019, Treasury informed Congress
    that these extraordinary measures would be exhausted before September 2019. Consequently,
    legislation was passed to suspend the statutory debt limit through July 31, 2021.7 While the debt
    ceiling has been lifted, it is only temporary as Congress has yet to resolve unfinished business
    when it comes to the Nation’s debt, and the long-term sustainability of the large programs.
    Although not included as a top open recommendation in its April 2019 letter to the Department,
    GAO raised the same concerns to Congress in its July 2015 report8 with the approach to managing
    the federal debt limit and its impact on Treasury’s borrowing costs and the need for alternative
    approaches.

    https://www.oversight.gov/sites/default/files/oig-reports/OIG-CA-20-005.pdf

    Random old news: The national debt reached $22.01 trillion in January, exceeding $22 trillion for the first time in history.

    Although the United States has maxed out its borrowing limit, experts say it will be months before it really begins to hurt. The Congressional Budget Office said last week the United States in the interim can rely on “a large inflow of tax revenues” in April as well as extraordinary measures to continue financing federal activities for a few months.

    Those measures will only net enough money for a short period of time. The CBO analysis predicted the Treasury, without a raise in the debt ceiling, will run out of money by the end of September.

  2. It might also be reasonable to assume that the Federal Reserve’s 24 Primary Dealers each have an HFT arm who used to provide steady flows of liquidity to the “rates” market. But with increasing volatility and higher headline risk/uncertainty, they may be loath to stay in for longer terms…especially if it seems that rates may not drop forever. Cash in the hand may be worth more than a few twittering basis points in the bush.

  3. Still the most liquid securities market in the world…..by far.

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