Watch out for the next round of shocks!The “terrible” liquidity numbers suggest stocks are more vulnerable than thought

2022-08-15 0 By

Zitong Finance observed that last week’s debate over how much and how fast the Federal Reserve will raise interest rates this year triggered sharp swings in yields, eroding liquidity in the US Treasury market again.The Bloomberg LIQUIDITY Index of US government securities, which measures the deviation between yields and fair value models, is approaching the peak it reached in early November.Back then, expectations of a Fed rate hike had begun to build in October, leading to historically large daily swings in short-term Treasury yields.In the latest round of rate increases, expectations that the Fed might consider raising rates by 50 basis points in March pushed two-year Treasury yields up 21 basis points on February 10, the biggest jump since 2009.The Fed typically moves policy rates in increments of 25 basis points.On the same day, a measure of expected volatility in US interest rates over the next 12 months reached its highest level since May 2010, a volatile period for THE US stock market.Peter Tchir, head of macro strategy at Academy Securities, said: On the Treasury side, older Securities are trading very poorly, which is a sign of a lack of liquidity.”As volatility has increased, markets have fallen deeply,” Jay Barry, U.S. rates strategist at jpmorgan, said in a Feb. 11 report.”The recent move has been fuelled by weaker liquidity in the Treasury market.”Market depth refers to the ability of the market to withstand large transactions without large fluctuations in securities prices.Together with price elasticity and spread, it is used as an indicator to reflect the liquidity of securities market.Based on the market depth of the top three bids and offers on the broker-dealer trading system between 8:30 a.m. and 10:30 a.m. New York time, all Treasurys had lower market depth, with the two-year note having less depth than the 5-year note and the 10-year note.As short positions with higher expected yields rise and continue to grow, liquidity will be key to avoiding a sharp fall in yields if a reversal in sentiment forces investors to exit those positions.