February Treasury liquidation highlights ongoing liquidity risk – Fed
A murderous bond market liquidation earlier this year appears to be on the minds of Federal Reserve officials, who in a report released Thursday pointed to the event as illustrating the lingering liquidity problems in the US $ 21 trillion treasury market. of dollars.
The February 25 drubbing followed a historically poor auction of 7-year Treasuries and pushed up yields as market liquidity evaporated within minutes. According to data from the ICE BofA Bond Index, that day’s negative yield for Treasuries, overall minus 0.72%, was the biggest loss of the year and one of the biggest of the last 12 months.
The event, which comes less than a year after the Fed had to inject $ 2 trillion into the bond market in the space of about five weeks to keep it from collapsing completely, “the importance of continuing to focus on the resilience of the Treasury market, âThe Fed said in its semi-annual report on financial stability. Read more
The functioning of the Treasury market has been “generally more stable” since the explosion last spring, which has been the subject of extensive investigation by the Fed and other market regulators. Thursday’s report noted that the Financial Stability Supervisory Board, headed by the Treasury Secretary and including the Fed chairman, “called for an interagency effort to understand the root causes of last year’s disruptions and find ways to improve the resilience of the market “.
Nonetheless, the February 25 incident remains concerning given the slow and uneven recovery in key liquidity measures in the Treasury market, the world’s largest bond market and touted by US officials as the deepest and most liquid also.
âMarket depth generally rebounded over the following weeks; however, for short and medium-term securities the recovery was patchy and slower on the net,â the Fed said.
Charts accompanying the report show that average market depth – a key measure of liquidity that may indicate the ability of Wall Street dealers to absorb large market movements – has plunged into liquidation, falling to the 5-year tenor to about $ 100 million, compared to $ 250 million. It has only recovered to around $ 150 million since then, while the depth of the 30-year bond market has more than fully recovered.
Thursday’s report also highlighted gaps Fed officials are seeing in other sectors, such as money market mutual funds and hedge funds, and could prompt a regulatory push soon to address them. .
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