A $21 Trillion Treasuries Mystery Is Bedeviling Global Markets

Bond traders have been saying for years that liquidity is there in the world’s biggest bond market, except when you really need it.

Last week’s startling gyrations in U.S. Treasury yields may offer fresh backing for that mantra, and prompt another bout of soul-searching in a $21 trillion market that forms the bedrock of global finance. While stocks are prone to sudden swings, such episodes are supposed to be few and far between in a government-debt market that sets the benchmark risk-free rate for much of the world.

Yet jarring moves keep occurring periodically in Treasuries, with some market participants pointing to heightened bank regulations in the wake of the 2008 financial crisis. Scrutiny over liquidity shortfalls intensified in October 2014 when a 12-minute crash and rebound in yields happened with no apparent trigger. Panic selling during the pandemic-fueled chaos a year ago, exacerbated when hedge funds’ leveraged wagers blew up, brought the issue to the fore again. And then came last week, when the gap between bid and offer prices for 30-year bonds hit the widest since the panic of March 2020.

The latest events “are a stark reminder what happens when liquidity suddenly vanishes in the deepest, largest bond market,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors.

At issue is whether this vast market is more vulnerable to sudden bouts of turbulence thanks to measures that have made it more difficult for banks to hold Treasuries. Some analysts say the tumult last week was magnified by questions over whether the Federal Reserve will extend an easing of bank capital requirements, which is set to end March 31. Put in place early on in the pandemic, the measure is seen as making it easier for banks to add Treasuries to their balance sheets.