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Treasury Traders Becoming ‘24 Hour Party People’

  • Overnight session is getting busier, bank's analysts write
  • Futures market picks up volume as balance sheets shrink

If your idea of a party is staring at a computer screen in the middle of the night in New York, JPMorgan Chase & Co. analysts have a market for you.

The $13.2 trillion Treasuries market is getting pushed around more by global developments, the analysts wrote in a note titled “24 hour party people redux: Global liquidity in U.S. Treasury futures.”

China’s slowing economy is becoming a bigger concern -- just look at Apple Inc.’s latest earnings report -- so volatility in Asian markets is reverberating around the world. That means bond traders in New York have to keep an eye on prices long after U.S. markets are closed.

“The overnight session has become increasingly important in recent years, as macro focus has shifted abroad and U.S. interest rate risk has been globalized,” the analysts wrote in a note Wednesday. That “often leaves traditional dealers and cash markets chasing price action in Asian and European trading.”

Sleep Sacrifice

Sleep-deprived Wall Street traders aren’t the only ones who should care. It underscores the changing structure of a market where plenty of strange distortions are happening, the analysts said.

Bond dealers’ trading books are smaller than before the financial crisis, and new regulations are making it more expensive to facilitate trades and provide some types of overnight financing. On top of that, reserve managers at global central banks sold more U.S. debt to raise cash last year, which put more pressure on the balance sheets of the dealers handling that business, the analysts said.

As a result, more trading is happening in futures relative to cash Treasuries, according to the note, since futures transactions don’t require banks to use their balance sheets. For one 10-year Treasury futures contract, about 5 percent of its volume comes around the open of trading in Tokyo and more than 25 percent is traded around the open in London, the analysts said.

“With no significant changes to regulatory constraints on dealer activity, FX reserve outflows, or financing market structure on the immediate horizon, we expect this trend to continue and likely accelerate,” the analysts said.

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