Liquidity in U.S. Treasuries worrisome as Fed tries to restore order
By Karen Brettell and Karen Pierog
March 13 (Reuters) - Liquidity problems in the $17 trillion U.S. Treasury market persisted on Friday even after the Federal Reserve on Thursday took drastic steps to shore up conditions in the largest market to be roiled by the global coronavirus crisis.
The Fed offered $1.5 trillion in three tranches of $500 billion repurchase agreement loans on Thursday and Friday and said it would start purchasing a broader range of U.S. Treasury securities than it has been of late.
The announcement led to a little more risk taking in stocks, which bounced Friday from the worst shakeout since 1987, but it has failed to restore order to bonds, where market participants said trading volumes were low and volatility high.
"It's incredibly difficult to trade. The markets have been on the precipice of freezing," said Robert Tipp, Chief Investment Strategist and Head of Global Bonds at PGIM Fixed Income in Newark.
The Fed also saw low take-up of the new loans by primary dealers. Banks borrowed only $119.5 billion from the $1.5 trillion on offer at the three new emergency operations on Thursday and Friday.
One issue is that different parts of the Treasury market are seeing large swings at different times as investors struggle to execute orders.
Rumors of large investors trying to sell large holdings of various bonds has added to negative market sentiment.
Yields on 30-year bonds on Friday jumped to an overnight high of 1.87%, before dropping back down to 1.41% in the morning New York trading session, an unusually large move.
The yields also had several instances where they spiked by more than 10 basis points during only a one-minute timeframe on Friday morning.
"Markets are functioning, they are just don’t have the capacity to deal with what everybody wants to do in a short period of time," said Jim Vogel, an interest rate strategist at FHN Financial in Memphis, Tennessee.
"You’ve got very specific things that are happening in a particular part of the Treasury market that are not happening elsewhere," Vogel said.
Yields on seven-year notes rose this week, spending some time above those of 10-year notes for the first time since the seven-year notes were reintroduced in 2009, in another sign of market dislocation.
Liquidity in older Treasuries, which are known as off-the-runs and make up the bulk of the outstanding debt, has been even worse than for more recently issued bonds, traders said.
U.S. Treasury Secretary Steven Mnuchin said on Friday that the U.S. Treasury and the Federal Reserve were working to keep markets open and to provide "unlimited liquidity."
The Fed on Friday launched a wave of $37 billion of Treasury security purchases under the enhanced market liquidity measures it announced on Thursday to address volatile conditions in the Treasury market.
Analysts expect, however, that it will need to cut rates and expand its bond purchases further to bring order to bonds and ease financial conditions.
The Fed holds its regular monetary policy meeting next week and traders see a 100% chance that it will slice its 1.0% to 1.25% target rate by at least 75 basis points, according to the CME's FedWatch tool.
"More is needed and expected to stop this liquidity squeeze from escalating into a deeper funding crunch," Morgan Stanley analysts said in a report sent on Friday. (Reporting By Karen Brettell and Karen Pierog; Editing by Alden Bentley and Diane Craft)
