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 FedSomething 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.