U.S. Treasurys market is ‘not well’ as ‘signs of illiquidity abound,’ B. of A. rates strategists say

image

Signs of trouble are cropping up in the world’s largest, most liquid government-securities market, B. of A. rates strategists say.

Large moves on very low volumes of Treasury inflation-protected securities, or TIPS, breakevens, a gauge of U.S. inflation expectations, are among the indications that the rates market is unsettled, the strategists say. “Collapsed” depth in the contract order book for 2-year Treasury futures and a 30-year auction last week, which Jefferies analysts described as “disastrous,” also are being cited as evidence of emerging problems.

“While each of these in isolation might be easy to ignore, when combined it shows a Treasury market that is challenging to manage risk even near peak Fed liquidity,” BofA strategists Mark Cabana, Ralph Axel and Meghan Swiber wrote in a note Monday. They said the market “is not well” and that “signs of illiquidity abound.”

“The Treasury market is unlikely to be a well-functioning market without ongoing official sector support” during the period that the Federal Reserve is tapering bond purchases and even beyond, they said. “The Fed appears to be aware of this now.”

Treasurys are the cornerstone to U.S. financial markets, used to finance government operations, manage interest-rate risk, and provide a risk-free benchmark for pricing other financial instruments. Therefore, liquidity, or the ability to buy or sell an asset with ease, is crucial to a healthy functioning market.

Worries about the persistency of U.S. inflation — along with the potential for an economic slowdown, particularly if the Fed is forced to hike its policy rate target — have led to a period of volatility in yields


U.S. fixed-income strategists use to measure liquidity stress were flashing “red” warning signs, while six were characterized as being “amber,” based on a recent report.

Should illiquidity in the Treasury market lead to a sharp increase in rates, “a material tightening of financial conditions is possible,” the B. of A. strategists wrote. There is also a risk that related markets like credit or mortgages “ could become illiquid and aggravate any unforeseen market shock.”

Trending Ideas

Featured Stocks On The Move

Daily Rundown

Top 3 Stocks in Leading Sectors
  • 3 Electric Power Stocks To Buy Now

    Featured Content Hawaiian Electric Industries, Inc. (HE) Hawaiian Electric Industries, Inc. is a holding company that provides electric utility services and financial services in Hawaii. Through its subsidiaries, it supplies... Read More

  • 3 Bank Stocks To Buy Now

    Featured Content Comerica Incorporated (CMA) Comerica Incorporated is a financial services company headquartered in Dallas, Texas, offering a range of banking products and services, including commercial and retail banking, wealth... Read More

  • 3 Machinery Stocks To Buy Now

    Featured Content Alta Equipment Group Inc. (ALTG) Alta Equipment Group Inc. is an integrated equipment dealership platform in the United States, operating through three segments: Material Handling, Construction Equipment, and... Read More

  • 3 Silver Stocks To Buy Now

    Featured Content Gatos Silver, Inc. (GATO) Gatos Silver, Inc. is a precious metals mining company primarily focused on silver and zinc production. Its flagship Cerro Los Gatos mine in Mexico... Read More

  • 3 Metal Production Stocks To Buy Now

    Featured Content Century Aluminum Company (CENX) Century Aluminum Company is a primary aluminum producer, with operations that include the production of high-purity, low-carbon aluminum used in automotive, aerospace, and industrial... Read More

  • 3 Medical Drug Stocks To Buy Now

    Featured Content Teva Pharmaceutical Industries Limited (TEVA) Teva Pharmaceutical Industries Limited is a global pharmaceutical company specializing in generic and specialty medicines. The company provides a wide range of treatments... Read More

  • 3 Paper Product Stocks To Buy Now

    Featured Content AptarGroup Inc. (ATR) AptarGroup Inc. is a global leader in providing innovative dispensing and packaging solutions, serving diverse industries like beauty, personal care, and pharmaceuticals. They focus on... Read More

  • 3 Restaurant Stocks To Buy Now

    Featured Content Brinker International, Inc. (EAT) Brinker International, Inc. operates well-known restaurant brands such as Chili’s Grill & Bar and Maggiano’s Little Italy. The company is a leader in the... Read More

  • 3 Investment Brokerage Stocks To Buy Now

    Featured Content Robinhood Markets, Inc. (HOOD) Robinhood Markets, Inc. is a financial services company known for its commission-free trading platform, which allows users to trade stocks, options, cryptocurrencies, and ETFs.... Read More

  • 3 Shipping Stocks To Buy Now

    Featured Content ZIM Integrated Shipping Services Ltd. (ZIM) ZIM Integrated Shipping Services Ltd. is a global container shipping company that provides cargo transportation services worldwide. The company operates a modern... Read More

  • 3 Mining Stocks To Buy Now

    Featured Content Perpetua Resources Corp. (PPTA) Perpetua Resources Corp. is a mining company focused on the exploration and redevelopment of the Stibnite Gold Project in Idaho, which is one of... Read More

  • 3 Airline Stocks To Buy Now

    Featured Content General Electric Company (GE) General Electric Company is a global industrial conglomerate with operations spanning sectors such as aviation, healthcare, power, and renewable energy. GE is known for... Read More