Markets have been severely tested by an explosion of volatility in US Treasuries following the collapse of the Silicon Valley bank that underpinned much of the global financial system after a dramatic slowdown in the early stages of the Covid-19 pandemic.
But as the $22tn market for US government debt this week endured its most volatile period since the global financial crisis a decade and a half ago, even surpassing levels seen in March 2020, investors and analysts said the market’s performance largely stalled. is
Daily trading volume more than doubled as SVB’s failure dented the safety of Treasuries. The banking crisis will force the Federal Reserve to slow or even shut down its plans to raise interest rates, further fueling demand, leading to the biggest one-day rally in short-term Treasuries since 1987.
These measures did not lead to a 2020-style crash, when investors began fleeing Treasuries en masse at a serious risk to the functioning of the entire financial system until the Fed stepped in with massive bond purchases.
“To me, it felt like the market was working. It works,” said Kevin McPartland, head of market structure and technology research at Coalition Greenwich. “Market structure has clearly held, with $1.5tn traded.”
Still, the current turmoil underscores that rampant volatility in treasury markets is the new normal, raising concerns in some quarters that the possibility of a financial crash is never far away.
Priya Mishra, head of global rate research at TD Securities, said, “We are one crisis away from a complete collapse of treasury market liquidity. A bailout for SVB depositors and emergency funding measures initiated by US authorities “prevented a major crisis”, she added.
About $1.5tn was traded in Treasuries on Monday and more than $1tn in the following three days. Trace The data more than doubled that recent average daily volume, which was about $650 billion in January and February Syphma.
Volatility in the market, tracked by the Ice BofA Move Index, reached its highest level since 2008.
There were signs of stress. Liquidity, the ease with which assets can be bought and sold, has deteriorated, and investors have reported paying more for larger trades. Some traders resorted to picking up the phone to place trades, rather than trading electronically, as they normally do.
“Funding pressures and liquidity pressures in the banking sector have filtered through to the Treasury market,” said Matthew Scott, head of global rates trading at AllianceBernstein. “The more expensive it is to trade, the less you can trade.”
But the trade was still possible, if expensive, Scott said. Liquidity conditions in some parts of the market were the worst since March 2020, but nowhere near as bad as they were then, when a meltdown in Treasuries sent markets around the world into a spiral.
The bank’s anger has also fueled talk of further regulation of the financial sector, which could cool participation in the treasury market. The Financial Times reported earlier this week that Fed officials are reviewing capital and liquidity requirements for mid-sized banks.
New rules designed to strengthen the banking system in the wake of the 2008-09 financial crisis are behind the increased volatility in Treasuries in recent years, investors have long argued.
Primary dealers – the big banks that deal directly with the Treasury Department in bond auctions and were the traditional providers of market liquidity – have withdrawn from the market. This is partly because post-crisis regulations have made it more expensive for them to hold Treasuries, and partly because of broader changes in risk appetite.
As their share of government bond trading declined, hedge funds and high-speed traders took their place, introducing a new degree of leverage risk to the market.
Some experts warn that any further constraints on banks as a result of the current crisis, even if only on smaller players, could chill liquidity and increase risks.
“Banks are now under the regulatory spotlight with this latest crisis – and primary dealer banks will not get a pass, if anything, to the contrary. “Regulators will ruthlessly scrutinize bank balance sheets to satisfy themselves that the largest banks are completely immune to failure and able to support themselves and the rest of the financial system,” said Yesha Yadav, a professor at Vanderbilt Law School.
Primary dealers now have to be more careful about how they use their balance sheets to make markets in Treasuries, Yadav said. “It looks like we’re going to have a really dismal few months ahead for Treasuries liquidity.”
Additional reporting by Katie Martin in London
