Every time sell side tries to get paid for liquidity, they scream about a "rigged market". Now there's no liquidity.
Treasury Liquidity Squeezed as Dealers Shut Off Machines
By Anchalee Worrachate and Susanne Walker
As soon as Charles Comiskey saw what was coming, he turned off his machines.
It was still early in the New York trading day on Oct. 15 and investors were already pouring into U.S. government bonds as global financial markets from Asia to Europe buckled. Because yields were falling so fast, Comiskey, the head Treasury dealer at Bank of Nova Scotia, realized that he ran the risk of being stuck with losses or unwanted inventory if his computers automatically generated quotes to buy and sell with customers.
So for about half an hour, as yields on 10-year Treasuries tumbled below 2 percent in the biggest plummet in five years, he executed client orders individually over the phone.
“It was a very high stress, very fearful trade,” Comiskey, whose firm is one of 22 primary dealers that trade directly with the Federal Reserve, said from his office in downtown Manhattan. “Once we recognized things started getting out of control, we shut it off immediately. It was like turning the clocks back to pre-electronic trading” in the 1990s. Bank of Nova Scotia (BNS) was hardly alone in taking steps to protect itself in one of the most volatile trading days since the collapse of Lehman Brothers Holdings Inc. in 2008, showing how regulators’ efforts to rein in risk-taking among the world’s biggest banks is causing disruptions in what is supposed to be the deepest, most liquid market in the world -- that of U.S. Treasury securities. Because dealers have cut back so much in recent years, concern is deepening that parts of the market have become less efficient in times of turmoil. Default Haven
Unlike other securities such as corporate bonds, Treasuries are backed by the full faith and credit of the U.S. government, which has never repudiated its obligations.
The $12.3 trillion market is also the world’s biggest for government bonds, exceeding the size of the next two nations combined and making it the haven of choice for investors seeking safety. During the credit crisis in 2008, Treasuries soared 14 percent, while both investment-grade debt and junk bonds sank. JPMorgan Chase & Co., a primary dealer, estimates the amount of U.S. debt available to trade at one time without moving prices has plunged 48 percent to $150 million since April. The measure is based on the average size of the best three bids and offers that go through the New York-based bank’s trading desks on a weekly basis.
That, in turn, may undermine the U.S. government’s cost to borrow if investors begin to doubt whether they will still be able to buy and sell Treasuries on a moment’s notice.
