Thursday, March 12, 2020

Are US Treasuries Really Facing A "Liquidity Crunch"?

That is what I just saw on an internet report, with 30-year Treauries supposedly especiallly hard hit. Rather stunning was a figure showing trading costs, which have supposedly massively spiked in the last week or so, reaching the highest levels since 2008.  Apparently this may be tied to exceptionally high volatility in the bond markets, especially the long term ones, which may explain it, although this has not bee much reported, I guess with so much attention on the volatile and mostly crashing stock markets.

What makes me wonder about this is that usually a lack of liquitdity results in higher yields on bonds, but this report also noted that in the last few days we saw for the first time ever the entire U Treasuries yield curve below 1 percent.  Indeed, I am under the impression that the old "safe haven effect" is operating, with foreign money flowing into US securities for safety.  But this report claims that people trying to sell 30 year bonds in particular have been having trouble finding buyers.  I confess that all this does not seem to hold together, although it may be that there have been brief moments of such lack of liquidity interspersed with periods of lots of it. 

Needless to say, the US Treasuries market is about as foundational to the entire global financial system as any market.  If somehow it seizes up in a serious way, the situation is going to get far worse in the financial markets and the economy than anybody has been talking about so far.

Barkley Rosser


Anonymous said...

500 billion from the Fed, they better hope it works

2slugbaits said...

Well, maybe we'll have to give MMT a second look. Sigh.

Jerry Brown said...

Yes maybe give MMT a second look. The US Treasury market is not going to 'seize up' unless the US government wants it to. But I know most of you guys don't want to hear it from someone who thinks MMT explains why pretty clearly. said...

NY Fed is apparently pumping in $1.5 trillion of liquidity to shore up the "irregularly behaving" repo bond markets.