Treasury Liquidity Mostly in Line With Volatility, Fed Economist Says

Treasury-market liquidity has mostly righted itself since the dislocations caused by the several regional bank failures in March, according to a Federal Reserve Bank of New York economist.

Liquidity in the US government bond market “continues to closely track the level that would be expected by the path of interest rate volatility,” Michael Fleming, head of capital market studies at the New York Fed wrote in a post on its Liberty Street Economics blog Tuesday. It “worsened abruptly” after the failures of Silicon Valley Bank and Signature Bank in March, but recovered quickly.

Fleming’s assessment of “whether liquidity has been unusual given the level of volatility” found that five- and 10-year Treasuries conform, while two-year notes show “somewhat higher-than-expected price impact given the volatility.”

Liquidity, the cost of converting an asset into cash and vice versa, can be measured in various ways. Fleming’s analysis uses spreads between bid and offer prices, order-book depth, and the price impact of trades for the the most recently auctioned two-, five- and 10-year notes during the New York trading day.

Treasury Market Liquidity Has Improved Since March