(Bloomberg) — As banking stress unleashed turmoil on Wall Street last week, a well-known bugbear is being blamed for making things worse: weak liquidity.
Scott Rubner of Goldman Sachs Group Inc., who has studied money flows for two decades, calculates that the ease of trading S&P 500 futures has plummeted 88% over the past two weeks. A similar gauge shows liquidity in Treasury futures down 83%. According to Rubner’s analysis, both measures have reached their lowest level since the pandemic crisis in March 2020.
Based on the current wide bid-offer spread, more than $2 million of buying or selling US stock futures is required before a trader risks moving the market, compared to an order book of at least $17 million. dollars in early March.
The increasing difficulty of trading stocks and bonds without affecting their prices comes as a collapse of Silicon Valley Bank and hawkish comments from Federal Reserve Chair Jerome Powell hit Wall Street traders.
“I have tracked the flow of money for the past 20 years and am shocked by the magnitude of some of this movement across asset classes,” Rubner wrote in a note to clients. “There’s some real-size volume being processed and risk being transferred, and it costs a lot to move things.”
According to Rubner, liquidity on 10-year Treasury futures, or the amount of money to add 1 basis point to yields, has fallen to $19,000 from $114,000 this month.
As concerns shifted from inflation to potential contagion across the financial industry, safe havens were sought from government bonds to gold, with a move by Barclays Plc, which the group is tracking, registering the biggest three-day move on record. Regional banks, on the other hand, lost more than a fifth of their share value in the same period.
Of course, liquidity crunches work both ways, with Tuesday being a mirror image of the past week. Regional lenders rallied with the index jumping as much as 11%. Two-year Treasury yields are up 22 basis points as of 3:20 pm in New York, poised for their biggest rise since June.
madly moved
A lack of liquidity is often dragged into discussions of market downturns, rightly or wrongly. In December 2018, for example, as the S&P 500 plunged to the brink of a bear market, both then-President Donald Trump and strategists at Goldman Sachs marked it could escalate the sell-off.
Many factors, such as the rise of electronic commerce and regulations, may have affected the ease of trading. Meanwhile, bouts of investor risk aversion are making it harder for traders to spot market-clearing prices, widening bid-ask spreads. This argues against the notion that an alleged lack of liquidity is the proximate cause of haywire wealth swings.
Read more: Top Wall Street traders assess 2022’s major liquidity fallout
Regardless, one thing is certain: the recent rush for protection has produced some of the wildest market moves in decades.
During the three sessions ended Monday, two-year government bond yields fell 109 basis points, the sharpest fall since 1987. At the same time, gold prices rose while the Japanese yen appreciated against the dollar. Overall, their three-day swing was the biggest since at least 1976, according to Barclays.
“Safe havens all saw major sigma moves, underscoring the aforementioned flight to safety,” Barclays strategists, including Stefano Pascale, wrote in a note.
All of this chaos has taken place amid a spike in trading volume. As liquidity reportedly dried up, investors turned to macro products like exchange-traded funds to make quick money or hedge against losses. According to Goldman, ETFs accounted for around 40% of total stock trading volume on Friday and Monday, one of the highest proportions in history.
“Record volumes don’t equal liquidity,” Goldman’s Rubner said.
