After hundreds of billions of bond purchases, there finally are some early signs that the Federal Reserve’s herculean measures to restore liquidity in the $18 trillion Treasurys market could be making progress.
Market participants pointed to how government bonds were gaining in price as stocks sold off at the end of last week, as a positive sign that there was more two-way trading in a market that had been slammed by indiscriminate selling.
Yet, the biggest part of the market, the so-called “off-the-run” segment, is still “trading very poorly,” said Stephen Stanley, Amherst Pierpont’s chief economist, on Monday in a MarketWatch interview.
“You can find liquidity in active issues, but nothing in off-the-run,” he said, adding that’s right where the Fed has been buying bonds to “sop up a lot of supply that people don’t want.”
“They’re helping, but I wouldn’t say it’s anywhere back to normal.”
Amherst Pierpoint is one of two dozen Wall Street firms that are so-called “primary dealers,” in the Treasury debt market.
Several of the Fed’s rescue efforts, including its bond-buying program, aims to free up space on broker-dealers’ balance sheets, enabling them to fulfil their role as middlemen in the buying and selling of securities.
“That’s a lot of really encouraging stuff,” said Tom Graff, head of fixed-income at Brown Advisory, in an interview, about early progress, at least in terms of bolstering asset prices. “We’re in an unusual time where you want to see Treasurys rising in price because it indicates maybe those dealer balance sheets are little bit more right-sized and people aren’t selling everything.”
Though lower yields do point to lower expectations for economic growth and inflation, in this case, it also indicates that government bonds were moving back in line with their usual behavior, said Graff.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.72% on Monday traded down to 0.723%, after trading as high as 1.27% on Thursday. Bond prices move in the opposite direction of yields.
Earlier last week, bonds have sometimes sold off in sync with stocks, a strange response that goes against the widely held belief that government paper would serve as insurance against a broader fall in risk assets.
One popular explanation for the spasms of selling in the bond-market, despite the expected demand shock from the coronavirus, is that sellers have been acting on their own imperatives and not on economic fundamentals.
For example, highly leveraged hedge funds liquidating their holdings of Treasurys to avoid losses and mutual funds selling their bonds to deal with redemptions have been cited as potential suspects.