Bond yields could drop if Treasury trading was like the stock market

Treasury markets have a liquidity problem fueled by regulatory changes after 2008, and one idea for fixing it could send trading volume higher — and bond yields lower.

Whether it happens or not, some changes to the Treasury market appear likely as it has become less liquid. "Investors around the world sold their Treasurys en masse, and the dealers were unable to handle the flow of volume," Stanford professor Darrell Duffie told Insider, referring to March 2020."They basically said, 'I hardly have any space on my balance sheet. If you want to sell me something, it's going to be at a really low price.' And so, basically, the depth of the market disappeared.

He referenced the equity options market, which underwent a similar change in 1973. Once a dealer-intermediated operation, trades exploded after the Chicago Board Options Exchange was set up to match buyers with sellers. With the increase in liquidity, Duffie expects transaction costs to drop, helping asset prices go up —"Meaning the yield of a Treasury security will go down, and the government will be able to fund the US deficits more cheaply."

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