Veteran Traders See Shades Of 2008 In Friday’s Action

In one of the more remarkable moves in recent memory (especially considering the low starting point), 30-year yields in the US dove as much as 33bps intraday on Friday to below 1.22%. It was Defcon-1.

This began early in Asia and it never let up. As documented here earlier, Friday saw a series of limit-up, circuit-breaker halts in Ultras amid a combination of acute fears about the coronavirus, a generalized risk-off trade and an apparent convexity event. Nomura suggested this is more “forced hedging/buying at the highs from mortgage investors, insurance companies” and anyone who’s short options.

“For those who don’t trade bonds on a regular basis, it’s difficult for me to convey the true ‘epic-ness’ of this move”, Kevin Muir remarked, in a Friday morning note. “I have seen comments from veteran traders [saying] they have never seen an overnight move of this magnitude”, he added. “Ever. Even during the 2008 crisis”.

The whole curve is now below the upper-end of the Fed’s range – again. That is: After this week’s emergency rate cut.

It took just three days for the long-bond to sound the same warning it rang out prior to Jerome Powell’s “panic” move. It’s hard to see how this is sustainable from now through the scheduled meeting late this month. Although the idea of another emergency rate cut (i.e., before the meeting) seems far-fetched, some manner of intervention (verbal or otherwise) can’t be ruled out.

To speak colloquially, there is no telling what’s going on under the hood right now, where that means that liquidity provision is likely succumbing to all manner of shenanigans.

In the course of detailing the manic action in rates around the Fed’s emergency cut earlier this week, JPMorgan’s Josh Younger and Munier Salem (who extensively documented the August convexity event and the role played by algos “who” left the market high and dry – and you can take “dry” figuratively and literally in this case), flagged “another, sudden drop in market depth against a surge in trading volume [that] was immediately preceded by a concerted drawback in liquidity provision among high frequency trader participants, who form an outsized share of market depth”.

So, in addition to speculation about what’s coming next from the Fed, the impact of convexity flows and the sheer rapidity of the risk-off news flow around the COVID-19 outbreak, you can also point to unreliable liquidity provision when looking to explain what’s happening in USTs.

Younger and Salem note that recent action shows “how fragile the growth in liquidity over the past decade has become; and once more suggests optically high depth …could fall dramatically should volatility shift higher into a downturn”.

“Rates market liquidity is so abjectly poor, and everything is trading so much like the world is short gamma and convexity”, Bloomberg’s Cameron Crise wrote. Have a look at the sheer magnitude of this:

Crise went on to quote someone he described as “an old-hand friend in Europe”, who apparently said the following on Friday morning: “This is the first time it’s felt a bit like 2008”.