Fed spigots help restore U.S. Treasury liquidity
NEW YORK/BOSTON, March 25 (Reuters) – The $17 trillion U.S. Treasury market perked up on Wednesday, after chaos over the last few weeks, as a decline in the so-called bid-ask spread on prices for notes and bonds pointed to increased liquidity and trading activity.
The market though remains a long way off from normalcy.
Liquidity in Treasuries diminished in recent weeks, resulting in spikes in volatility as the fallout from the coronavirus pandemic escalated.
The bid-ask spread on benchmark U.S. 10-year Treasury notes had widened as much as 200 basis points on March 20, but narrowed to within a range of six basis points or less on Wednesday, according to Refinitiv data. That is near the typical levels of three basis points or less seen before the coronavirus crisis, reflecting more market participants and making it easier for dealers to hedge risk.
Analysts and traders attributed improved market conditions to the Federal Reserve’s aggressive interventions, which include buying corporate bonds, mortgage-backed securities, and Treasuries.
A roughly $2 trillion U.S. stimulus package that was agreed between Republicans and Democrats to help consumers and companies affected by the coronavirus pandemic, also added to more positive market sentiment.
“It is nice to have a period of calm amidst the chaos we endured at the beginning of the contagion, but we will still be subject to swings in the market as the nation’s ability to stem COVID-19 (coronavirus) is put to the test and news on state of the health of the American public continues to filter through,” said Susan Estes, chief executive officer of OpenDoor Securities, a trading platform for off-the-run U.S. Treasuries and TIPS (Treasury Inflation-Protected Securities).
Off-the-runs are older Treasuries, which represent almost 99% of the total outstanding debt, but make up only about 25% of daily trading volume.
OpenDoor produces liquidity scores for all 350-plus Treasury securities, measuring the bid-offer spread on each individual issue based on a number of factors.
Estes said she had seen an improvement in the liquidity scores on Wednesday over all previous days since the crisis began.
The Fed has been buying $75 billion per day in Treasuries and by the end of the week it will have purchased nearly $700 billion since it launched its Treasury purchase program in mid-March.
Fed purchases have already been more than twice as large as the $270 billion in U.S. Treasuries held by primary dealers, Barclays said in a research note.
Priya Misra, head of global rates strategy at TD Securities in New York, said the better liquidity reflects Fed efforts that reduce the need for investors to sell everything they can.
“We are not at fully normal levels yet – think it will take some more time for risk assets to stabilize and dealer balance sheets to be less constrained,” she added. (Reporting by Gertrude Chavez-Dreyfuss in New York and Ross Kerber in Boston; Editing by Tom Brown)
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