U.S. bond market participants are worried market liquidity will keep deteriorating as the U.S. Treasury continues to issue large amounts of debt to back deficit spending while dealers struggle to keep up with the ballooning size of the market.
“I do worry about market liquidity,” Chris Concannon, chief executive of MarketAxess, a fixed income electronic trading platform, said at the conference. “Right now we issue Treasury debt to pay interest on Treasury debt ... and if you look at the players supporting liquidity, they’re not increasing,” he said.
Additionally, the yield curve remains deeply inverted - meaning short-term debt yields more than longer-dated bonds. This is a further disincentive for banks to be exposed to so-called duration, or the interest rate sensitivity of their positions. After improving at the end of last year as Treasuries rallied on expectations of interest rate cuts, liquidity has worsened over the past few months, according to an analysis by Steven Abrahams, head of investment strategy at Santander US Capital Markets. He calculates liquidity by measuring deviations between certain Treasury yields: in illiquid markets, deviations tend to persist while in liquid markets they go away quickly.
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