Treasury Liquidity Beats August Heat as Market Shows More Depth

Updated on
  • JPMorgan Chase measure finds ability to handle bigger trades
  • U.S. 10-year yields little changed, hold in tight August range

The steamy days of August can be a tough time to trade Treasuries when short-staffed desks crimp market-making capabilities.

That isn’t the case this year as liquidity in $13.5 trillion U.S. debt market, or the ability to trade without substantially moving prices, has rebounded this month, according to JPMorgan Chase & Co. The bank’s measure also shows improvement this year since May relative to the last half-decade, a positive sign in the wake of concern raised since the October 2014 "flash rally."

The amount of Treasuries that can be traded at one time without moving prices on average in August was $190 million, up from $163 million in the same month in 2010-to-2015 period, JPMorgan analysis shows, using its own data and that from ICAP Plc’s BrokerTec. The measure of market depth is based on the average size of the best three bids and offers for trades between 8:30 a.m. and 10:30 a.m. in New York.

“Typically, liquidity declines pretty regularly in August, reflecting vacations schedules more than anything else,” said Joshua Younger, an interest-rate derivative strategist at JPMorgan in New York. “This year, we have not seen that usual pattern. This has kept volatility in check.”

Treasury 10-year notes moved in their tightest monthly range in almost a decade, with the yield swinging between 1.46 percent and 1.63 percent. Last year in August, the yield’s span was more than twice that gap -- from a low of 1.9 percent to a 2.29 percent peak.

The 10-year yield rose one basis point, or 0.01 percentage point, to 1.58 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 99 1/4.

Through Monday, the average temperature in New York’s Central Park this month was 79.2 degrees Fahrenheit (26.2 Celsius), according to the National Weather Service in Upton, New York.

Option measures of futures swings have declined as well. A CBOE index that tracks Treasury volatility is down 24 percent from a June peak just days after Britain voted to quit the European Union.

The ability to transact in Treasuries has drawn scrutiny since Oct. 15, 2014, when the securities convulsed with no apparent trigger. The 10-year note yield dropped as much as 34 basis points, before closing down six basis points.

The jury is still out on the cause of that volatility, and the Treasury Department is conducting a review of the market’s structure. Yet dealers say post-financial-crisis regulatory requirements have crimped their ability to take on risk and make markets.

JPMorgan’s gauge shows depth improving beginning in May, with the average during that four-month span at $205 million, compared with $181 million for the 2010-2015 period. The more Treasuries you can trade at one time without moving prices shows better liquidity as it indicates investors and traders can more easily enter and exit positions of larger size.

“Liquidity has gotten better through the year in a meaningful and measurable way,” Younger said.