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Treasuries Haven Bid Overwhelmed as Traders Shed Liquid Assets

Emily Barrett
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Treasuries Haven Bid Overwhelmed as Traders Shed Liquid Assets

(Bloomberg) -- The haven bid in Treasuries gave way to a rush of selling Wednesday with traders scrambling to unload their most easily traded assets -- even the safest ones.

U.S. government yields climbed even as stocks slumped in the latter stages of an exceptionally volatile session. The benchmark 10-year swung in a 20 basis point range Wednesday, hitting a peak above 85 basis points just ahead of a $24 billion auction. The yield rallied back only briefly from these levels on more worrying news on the coronavirus, before resuming its ascent.

The sell-off came as a shock in a market that’s been setting fresh record low yields in recent weeks. Seasoned participants said it’s a sign that the most valuable securities are now getting offloaded in stressed market conditions.

Treasuries are selling off because they’re the “only product with any semblance of liquidity,” said Bill Finan, senior managing trader at Columbia Threadneedle.“So to hedge, however inefficient the hedge, you sell rates, because you can’t sell any spread product.”

Derivatives markets reflected the mounting pressures. The spread between the cheapest-to-deliver Treasuries bond and its underlying futures contract fluctuated sharply Wednesday, consistent with futures outperforming Treasuries cash trading.

The Federal Reserve took further steps, in addition to last week’s 50-basis-point rate cut, to alleviate strains. The New York Fed Wednesday announced an increase in its overnight repo operations, along with three one-month term operations.

“In a crisis you’re going to sell what you have, not what you want to,” said Priya Misra, rates strategist at TD Securities.

“This is not a normal functioning market.”

The moves come as investors await further assurance from lawmakers after the World Health Organization declared a pandemic. President Donald Trump promised a detailed proposal Monday, and Treasury Secretary Steven Mnuchin said he’s hoping to provide $200 billion or more in liquidity by delaying tax payments. But the administration has yet to offer full details on stimulus measures to stem the economic fallout of the outbreak. After meeting with Wall Street executives Wednesday, Trump said he will make a statement on the coronavirus at 8 p.m. Washington time.

“The Street has lost patience with feints from the White House,” said Finan. “Ergo, they’ve got to sell something.”

--With assistance from Edward Bolingbroke.

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Jenny Paris, Nick Baker

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