Great stress in the treasury market (msn.com)
Great stress in the treasury market
Article by Alex Wehnert • Yesterday at 20:03
The ICE BofA Move Index, which tracks volatility in bond markets
Great stress in the treasury market
Article by Alex Wehnert • Yesterday at 20:03
Great stress in the treasury market© Provided by Börsen-Zeitung
The recent turmoil in the US banking system is also shaking up the secondary market for government bonds. Liquidity in the treasury segment collapsed sharply after the collapse of Silicon Valley Bank – while volatility increased massively in mid-March, the high difference between buy and sell prices made it much more difficult for traders to execute trades.
At the end of last week, the difference between buy and sell prices for two-year Treasuries was 30, according to the platform Tradeweb.
%, which is a significantly higher level, but even a decline compared to the previous trading days.
Similar liquidity problems have recently occurred with German government bonds. The difficult conditions for US and German government bonds, which are regarded as safe havens and are actually an important point of contact for investors, especially in times of crisis, are also having an impact on other asset classes such as corporate bonds and equities.
Concerns about the liquidity of the Treasury secondary market have persisted since the 2008 financial crisis. But traders stress that the situation is currently more tense than it has been in the past decade. The level of market stress can be seen in an index by the Office of Financial Research, an office of the US Treasury. This is approaching the levels from September, when it marked the highest level since the corona crash in spring 2020.
Also striking are the rises in market volatility sub-indices and safe-asset valuations. The ICE BofA Move Index, which tracks volatility in bond markets, has even shot above the levels recorded in March 2020 in the middle of this month.
From traders' point of view, the Federal Reserve's tighter monetary policy has created the conditions for increased volatility. In the wake of interest rate hikes since last spring, Treasuries have come under considerable pressure, with the yield on the ten-year bond soaring above the 2008 mark in September for the first time since 4.
% and has broken through it several times since then.
Strong fluctuations
In view of the low price levels, there is all the more potential for counter-movements, which take place in times of crisis under strong fluctuations. In mid-March, the current yield on ten-year Treasuries fell below 3.4
%, on Wednesday it was 3.57
%. At the beginning of the month, the yield of the two-year benchmark reached a closing level of more than 2007 for the first time since 5.
%. The spread to the ten-year security was thus more than one percentage point at settlement, which was last the case in 1981. At midweek, however, the two-year Treasury yield was just above 4
%.
The turbulence in the banking system has triggered further uncertainty about the monetary policy outlook. After the collapse of Silicon Valley Bank, as a result of which several medium-sized and regional US banks came under pressure, market participants hoped that the Fed would move away from its restrictive course. Most recently, however, the central bank raised its key interest rate by 25 basis points in the range of 4.75 to 5
%. According to analysts at private bank Hauck Aufhäuser Lampe, the monetary authorities are keeping an eye on financial stability, but are currently still giving priority to the fight against high inflation.
Now market participants are still desperately looking for liquidity. The activity in index funds brings a certain relief. According to data service provider Refinitiv Lipper, exchange-traded funds on US government bonds have recently seen six consecutive weeks of inflows – reaching a record $8.4 billion between March 15 and 22.
However, investors fear further distortions in the US banking system. Because in the securities portfolios of the financial institutions there are still huge government bond reserves. If other financial institutions wobbled, billions in volumes could reach the market at once – and volatility could thus continue to rise massively.
The ICE BofA Move Index, which tracks volatility in bond markets
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