Since the bond market’s version of the “flash crash,” the once unusual bursts of volatility have become increasingly more common. The United States government bond market is considered the deepest and most liquid in the world at $12.9 trillion. However, it is now plagued by more episodes of serious turbulence than any time since roughly the 1970s. “By one measure, outsize swings are occurring almost twice as often as statisticians would normally expect, according to data compiled by TD Securities.”
Steven Meier, the head of cash, currency and fixed income at State Street Corp—which oversees $2.4 million—put it pithily: “This isn’t your grandfather’s market anymore.” More and more people are saying that, “rules intended to limit financial risk-taking have made Wall Street bond dealers far less willing to make markets in Treasuries, which has exaggerated price swings and led to brief periods of illiquidity as investors try to decipher the Federal Reserve’s intentions on interest rates.”
One important development has impacted the behavior of Treasuries: ultra-fast computer trading which “has caused Treasuries to behave more like equities and raised thorny questions about the underpinnings of the world’s risk-free asset.” Recently, “researchers at the New York Fed said they found evidence that high-frequency traders may be creating an illusion of liquidity, especially when investors look to move large blocks of Treasuries.”
The big concern is the potential to threaten confidence in a market that is, “the benchmark for borrowers everywhere in the world.” Any worries about volatility in Treasuries have the potential to jeopardize confidence and create market jitters.
Meanwhile, as the Fed continues to get closer to ending the near-zero rate policy, there is more potential for disruptions. Stewart Taylor is a money manager and explained, “Liquidity is an issue when the algos kick in and do crazy stuff and although they’ve pushed the cost of trading lower, to me, it’s not really worth the trade-off. For someone who legitimately has trades to do, you can’t execute quickly enough anymore.” Nearly a decade ago, Treasury trading happened over the phone with Wall Street bond shops. Today, Treasuries get traded in microseconds with advanced computer algorithms thanks to new technology.
New York Fed President William C. Dudley explained about market liquidity, saying, “It’s even hard to think about it when things are happening at that rate of speed. There’s a lot more work needed to really understand this area.” This move towards more automation might, “be spurring big swings in Treasuries to occur more often according to TD. Daily moves in 10-year Treasury yields have exceeded one standard deviation—which is equal to about 3.4 basis points, or 0.034-percentage point—about 58 percent of the time this year. That’s the highest reading going back to 1975.”
The outcome of high speed trading and Treasuries is still debatable, but it’s fair to assume that the ultra-fast, computer-driven trading in Treasuries will become increasingly prevalent. The drive for optimal prices, convenience, and speed means that electronic trading is an important, lasting, and influential innovation.
The impact of innovative technology within markets is evolving almost as quickly as the trading. While technology may change, good financial advice remains constant. Our experts at Apex Financial Advisors are here to help your portfolio endure the turbulence and volatility. It’s never too late to get started—call an advisor today!