(Bloomberg) -- The Federal Reserve’s kitchen-sink approach to bond purchases seems to be restoring order to a world where recently only the most liquid Treasuries were in demand.
Price discrepancies in the Treasury market are lessening after $225 billion in purchases over the past three sessions and a new pledge for unlimited bond buying on Monday. The spread between more liquid current bonds, known as “on-the-runs” and older so-called off-the-run securities has tightened as more orderly trading returns.
“We are seeing major improvements in the liquidity of financing-intensive off-the-runs, which have been the epicenter of the Treasury market dislocations over the last two weeks,” JPMorgan Chase & Co strategists including Jay Barry wrote in a note Monday. “While it is too early to call this a trend, we are encouraged that most indicators we watch indicate Treasury-market dysfunction has decreased sharply.”
Two-year yields trending toward the Fed’s interest rate on excess reserves, the outperformance of off-the-run bonds and a reduction in leveraged short-positions in Treasury futures were all evidence of a more normalized market, the JPMorgan team wrote. Still, long-term yields continue to suggest dislocations, they said.
Treasury Trade Crunch Stuffed Dealer Balance Sheets With Bonds
A surge in demand for liquidity upended the Treasury market this month with spreads blowing out between futures, on-the-run bonds and their off-the-run peers. The dislocations helped sparked losses in a number of popular hedge fund strategies which exacerbated funding pressure for cash-starved companies.
The Fed unveiled unprecedented measures to shelter the economy on Monday. Among the measures, the central bank will buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep borrowing costs at rock-bottom levels and help ensure markets function properly.
The Fed plans to purchase another $75 billion in Treasuries on Tuesday.
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