Treasury Market Turmoil At Most A Symptom — Brian Romanchuk

There has been major disruptions in Treasury market liquidity, with it being very difficult to sell off-the-run bonds. My initial reaction to these stories is that this is the typical complaining you get from people in any overly-specialised field when something slightly atypical happens. My argument is the worst case interpretation is that this is a reaction to one or major entities' balance sheets blowing sky high. Alternatively, this is just what happens when too many people take finance academics too seriously, and build their entire business model around the premise of markets always being liquid and orderly 24/7. That was always a stupid assumption, and so this is just reality intruding on that fantasy.

As a disclaimer, I am basing my comments solely upon the chatter I see in media reports. My feeling is that we are seeing a repeat of similar trading patterns from the Financial Crisis, and I am extrapolating from that experience....

Bond Economics
Treasury Market Turmoil At Most A Symptom
Brian Romanchuk

Edward Harrison — If foreigners are dumping Treasuries, how should you respond as an investor?

One of the lead stories at Bloomberg this morning is an article about foreigners shying away from “financing the US government”. And the conclusion of this article is that it could mean higher interest rates in the US. Is this conclusion the right one though, and how should you respond as an investor? I have some thoughts on that below....

Harrison opines that Bullard's view of Fed policy will likely prevail.

Credit Writedowns 

If foreigners are dumping Treasuries, how should you respond as an investor?

Edward Harrison

Ernst Schaumburg and Ron Yang — The Workup, Technology, and Price Discovery in the Interdealer Market for U.S. Treasury

The interdealer market for Treasury securities shares many features with other highly liquid markets that trade electronically using anonymous central limit order books. The interdealer Treasury market, however, contains a unique trading protocol, the so-called workup, that accounts for the majority of interdealer trading volume. While the workup is designed to enhance liquidity in a market with diverse participation, it may also delay certain price-improving order book adjustments and therefore affect price discovery. In this post, we exploit the tight relationship between the ten-year Treasury note traded on the BrokerTec platform and the corresponding Treasury futures contract to explore how the workup protocol affects trading in the interdealer market and to highlight the impact of technological changes on observed trading behaviors.

FRBNY — Liberty Street Economics
The Workup, Technology, and Price Discovery in the Interdealer Market for U.S. Treasury Securities
Ernst Schaumburg and Ron Yang

Michael Fleming, Frank Keane, and Ernst Schaumburg — Primary Dealer Participation in the Secondary U.S. Treasury Market

The recent Joint Staff Report on October 15, 2014, exploring an episode of unprecedented volatility in the U.S. Treasury market, revealed that primary dealers no longer account for most trading volume on the interdealer brokerage (IDB) platforms. This shift is noteworthy because dealers contribute to long-term liquidity provision via their willingness to hold positions across days. However, a large share of Treasury security trading occurs elsewhere, in the dealer-to-customer (DtC) market. In this post, we show that primary dealers maintain a majority share of secondary market trading volume when DtC trading is taken into account. We also use survey data on large dealers to characterize activity in the DtC market and discuss some of the gaps in the available Treasury trading volume data.

FRBNY — Liberty Street Economics
Primary Dealer Participation in the Secondary U.S. Treasury Market
Michael Fleming, Frank Keane, and Ernst Schaumburg