Some investors are growing increasingly concerned about liquidity disruptions in the more than $500 billion-a-day U.S. Treasury market, as volatility in the face of a spreading coronavirus outbreak and gyrating oil prices fuels massive shifts in yields.
Depth in the market for 10-year U.S. Treasurys - a measure of open orders - hit its lowest level since the financial crisis on Monday, analysts at JPMorgan said in a note to clients.
Investors say that some 30-year bonds also traded with unusually wide spreads to buy and sell the debt, making it more difficult and expensive to complete transactions. In some cases, they were not able to find a price for the bond at all.
“I've been in fixed income markets going back to 1987 and it's a very, very rare event that you struggle to get an active price in the long (U.S. Treasury) bond at any time,” said Gary Kirk, founding partner and portfolio manager at TwentyFour Asset Management.
Kirk said he tried two large counterparties before managing to get a satisfactory price during a recent transaction. "It was a significant struggle," he said.
JPMorgan noted that liquidity during European and Asian hours has been even worse than during the U.S. day.
Market participants attributed some of the liquidity gaps to banks and computer-driven trading programs paring back their trading or limiting the size of their trades due to the volatility in markets.
Fears over the economic impact of the spreading coronavirus and a plunge in oil prices have driven investors into Treasuries - a popular haven asset - dragging yields to record lows. Bond yields fall when prices rise.
Tom di Galoma, managing director at Seaport Global Holdings, said the pockets of illiquidity are partially the result of investors piling into Treasuries in hopes of mitigating the potential damage from an equity rout that took the S&P 500 to within spitting distance of a bear market earlier this week. Those same investors are then often reluctant to sell, he said.
Another factor has likely been liquidity providers turning off computer programs that are typically used to trade. “It just seemed like a lot of the algos got turned off and it’s been sort of happening on and off for two weeks,” he said.
Widespread work-from-home arrangements in the face of the coronavirus outbreak could exacerbate the lack of liquidity in markets, J.P. Morgan said in a separate note to clients.
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