The U.S. Treasury market is a bit like a lake in the midst of a drought. All the action – fish, frogs, crawdads, and such – that was once hidden in the depths has become a lot more visible as the water shallows.
For decades, traders and investors have turned to U.S. government debt – Treasury bills and bonds – because the market was so deep that hefty trades could be placed without triggering significant price changes, Bloomberg explained. That’s one reason U.S. Treasuries have long been sought as a safe haven in tumultuous times.
Recently, however, the U.S. Treasury market has become more responsive to trades. The yield on 10-year Treasuries rose above 2.3 percent last Tuesday for the first time in months before closing lower on Friday. Some theorize yields are being pushed higher as investors try to stay ahead of Federal Reserve activity or changing inflation expectations, but others say the issue is liquidity.
Liquidity is the ease with which traders can buy and sell bonds. In a highly liquid market, bonds can be bought and sold easily. In a less liquid market, trading becomes more challenging. Bloomberg contends the U.S. Treasury has become less liquid because of financial regulations that were adopted after 2008 to reduce risk taking. The regulations have made bond dealers less willing to hold inventory and facilitate trades. Liquidity also was affected by the Fed, which bought lots of government bonds in its effort to stimulate the economy.
Bloomberg said, “How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.”
Treasury market volatility had little affect on U.S. stock markets, which finished the week higher.