Friday, November 25, 2022

More On The Creaking Treasury Bond Market

In a recent post I pointed out that liquidity in the secondary market for US Treasury securities is at the lowest point in years, creating serious problems for dealers, traders and the Treasury itself.  I did some more data mining in SIFMA  and came up with the chart below.

You can see that the average daily volume in all Treasury securities (bills, notes, bonds, TIPS) as a percentage of all marketable Treasuries outstanding (ie excluding those held in the Social Security accounts) is at the lowest level ever.  The big drop in activity came about after the Debt Crisis in 2008-09 and has been falling steadily since.

This drop in activity is very worrisome, particularly now when the spike in inflation has led to sharply higher interest rates and an increase in new bond issuance to cover higher budget deficits and debt service payments/refinancing.

Why did activity drop in the secondary market?  Partially, it is due to the sharply higher amount of bonds held by central banks, particularly the Fed, which now owns 6 times more Treasuries than in 2008.  Such holdings don't trade, so the percentage traded has come down - but this can't explain everything.

Amount Of Treasury Securities Held By The Fed

Something else is going on… it could be the near zero interest rate environment that held for such a long time sapped all desire to trade - there was very little price volatility for years on end. Also, investors had no reason to sell their older higher coupon bonds since they could not replace them.

No matter the reason, low liquidity and low volume is troubling and could create serious problems for the government’s finances.


  1. Why would a rational investor buy treasuries at negative real interest rates? When rates turn positive, liquidity will rise.

    1. Good point! Yet, the Treasury must still find buyers for its bonds to finance the budget deficit and to refinance the existing debt. Paying around 8% (ie around inflation) is prohibitive given the huge debt amassed by the government and the private sector, so the only solution is to kill inflation ASAP.

    2. any attempt to halt inflation at say 2%?, will likely mean low wage labourer pay goes down in nominal terms...

    3. Another way to look at this. If USD is backed by gold, there will *always* be a market for treasuries. In today's market, however, holding treasuries means *less* gold at maturity. Why would any sane person do that?


    5. By H.
      Replying to Anon.

      I quite agree that buying Treasuries right now is “insane”, given the highly negative real returns. (Same, and worse, holds for bonds issued by any eurozone country. )

      In fact, the Treasury bond market has become very much less liquid AND less active, a very bad sign, indeed. I would not be surprised at all to see a failed auction in the near future - in fact , I expect it unless a deep recession develops. But even then, the budget deficit would expand and force the Treasury to raise more money by selling more bonds. It’s almost an impasse, unless:

      1. The Fed kills inflation by raising rates even more than currently expected AND sharply
      increases QT.
      2. The government raises taxes to eliminate the deficit, or close to it.

    6. It seems like we are forever in uncharted territories. I appreciate your valuable insights very much. Thank you!

    7. i heard Zimbabwe makes some really good charts. =)