Trading Volume Is Rising and Depth Is Improving in the Treasury Market

(Bloomberg) -- The world’s biggest debt market just keeps getting bigger, and its growth this year has come along with rising trading volumes and improving measures of depth.

In their latest litmus test on the structure of the $15 trillion U.S. Treasury market, strategists at JPMorgan Chase & Co. found that over the last couple of years the market has reversed a declining trend that had started in 2011. Trading volume increased to average $556 billion a day in 2018 from an average of $502 billion in 2017, a team including Jay Barry said in a note. At its trough in 2015, volume averaged about $480 billion. The ability to trade without substantially moving prices, known as market depth, has also improved and is holding more than 20 percent above its long-term averages.

“Trading volumes have increased enough to keep pace with the growth of the market, and turnover has stabilized in recent years, after being on a downward trend for the early part of the post-crisis period,” Barry wrote. “The macro environment has likely contributed to increased volumes as the Fed has been on a quarterly pace of rate hikes since late 2017, and the runoff of the Fed’s Treasury holdings has accelerated.”

The ease in transacting in Treasuries has drawn scrutiny since October 2014, when the securities convulsed with no apparent trigger in what’s been dubbed the flash rally. America’s debt pile has grown by over $2 trillion since 2014 and will continue to do so as Treasury Secretary Steven Mnuchin has boosted note and bond sales to fund an increasing government shortfall and the Federal Reserve is unwinding its debt purchases.

The Treasury Department and other regulators have taken steps to boost the strength of the market since the flash rally, including getting the Financial Industry Regulatory Authority in July 2017 to begin collecting market data from its members. Last year Craig Phillips, a counselor to Mnuchin, said Treasury was considering whether to release the trading data to the public and had started reaching out to market participants to test the idea.

The market’s depth in on-the-run Treasuries tends to decline $31 million for each 1 basis point increase in the intraday range of the 10-year yield, an about 20 percent improvement compared to the $39-million average decrease over the 2014-2017 period, the JPMorgan analysis showed. The improvement varies by maturity sector, with shorter-term debt lagging. Liquidity in off-the-run debt has improved also, the analysts said.

Rising turnover has come also as the combined share of foreign owners and the Fed has fallen to 58.6 percent of the market, from more than 67 percent earlier in the decade, Barry said. That leaves more of the debt in the hands of investors who tend to transact more, such as dealers, hedge funds, and private equity accounts.

“Market depth has become more resilient to heightened volatility in markets over the last year,” Barry said.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Jenny Paris

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