Yahoo Finance Treasury Liquidity Is Better Than Traders Feared, JPMorgan Says
(Bloomberg) -- For investors watching US Treasuries for signs of renewed turmoil, JPMorgan Chase & Co. has some advice: Don’t worry, liquidity in the world’s biggest bond market is on the mend.
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“Broad measures of liquidity have been on an improving trend through 2024, supported by declining delivered volatility amid one of the longer Fed on-hold periods in modern history,” JPMorgan interest-rate strategists led by Jay Barry said.
Liquidity — or the ability to buy or sell large volumes with limited impact on price — is measurable in a variety of ways, many of which paint a picture of a market that’s stable to improving, Barry and colleagues including Phoebe White, Afonso Borges and Liam Wash, wrote in a report dated Friday.
By any measure, Treasury market liquidity experienced several breakdowns in the past decade, most recently at the onset of the pandemic. Given the market’s status as the linchpin of the global financial system and reputation as a safe investment, those episodes set regulators on an ongoing crusade for reforms aimed at averting future crises.
Per JPMorgan’s preferred gauge, market depth — based on the quantity of notes or bonds traders are willing to buy or sell at a single, advertised price — “has been steadily improving” over the past year, the strategists said. That benchmark, calculated from sizes posted on CME Group Inc.’s BrokerTec electronic trading platform, collapsed in March 2020.
It rebounded partially when the Federal Reserve began buying Treasuries in huge quantities to stabilize financial markets, then slumped again in 2022 when Fed interest-rate hikes sent bond market performance into a tailspin.
Market depth remains about 50% below its decade-long average, “as Treasury market liquidity remains highly sensitive to uncertainty,” the strategists wrote. The end of Fed rate increases in July 2023 was followed by a surge in expectations for rate cuts beginning this year. Those have been reined in by strong economic performance.
Measures of liquidity that sample the market differently, however, judge it to be historically poor.
JPMorgan’s market depth measure is based solely on the the most recently-issued notes and bonds in the $27 trillion market, which change hands most frequently. Looking at the market more broadly, the strategists noted, liquidity in 30-year bonds sold during the late 1990s and maturing in the next few years has deteriorated.
Bloomberg LP, the parent of Bloomberg News, has its own Treasury liquidity gauge that incorporates metrics for every note and bond. That measure shows liquidity in the full bond universe is worse than at any point since the global financial crisis. A dozen or so soon-to-mature 30-year bonds have extremely poor liquidity, Bloomberg-compiled prices show.
Augur Labs LLC also detects the divergence of liquidity among different segments of the market. Its Treasury Dislocation Index excludes the most recently issued notes and bonds in order to assess the less-liquid part of the market.
Like the Bloomberg index, Augur’s gauge — based on the average deviation from fair value — has shown deterioration in the overall market. But its subset that excludes 30-year bonds that mature within five years signaled an improvement, suggesting the dislocation is mostly concentrated in a handful of old securities.
“The broad market is functioning well,” said Helin Gai, president of Augur Labs. “The forest is fine” but for a few “rotten trees.”
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