1/ A QUICK REVIEW OF THE BOND MARKETS: Last few sessions have seen major markets contend with their own set of unique issues but it seems all assets are dealing with illiquidity & correlation breakdowns (within asset classes and on a cross-market basis) what’s going on? @RaoulGMI
2/ US TREASURIES – THE LAST LINE OF DEFENSE PT-1: Treasuries are key to the foundation of the banking system (and globally via USD), when the biggest bond market in the world is not behaving as normal, it sends shockwaves rippling thru itself and other assets. @vol_christopher
3/ US TREASURIES – THE LAST LINE OF DEFENSE PT-2: A lot of investors will throw USTs into a generic category, but there are various products where each have their own set of attributes/constraints. What we are seeing is the UST market compete with itself, never good. @YfyGomez
4/ US TREASURIES – THE LAST LINE OF DEFENSE PT-3: So, what are those products? At a high level there are new USTs (called on-the-runs) and then there are old USTs (called off-the-runs). This can apply for T-bills/FRNs, nominal USTs, TIPS and things called STRIPS. @EconguyRosie
5/ US TREASURIES – THE LAST LINE OF DEFENSE PT-4: Running in parallel are derivatives based on USTs, or US rates, in the form of Eurodollars, Treasury futures, swaps and a nascent market based on SOFR. Funding for US rates products simply comes from cash or REPO. @Barton_options
6/ US TREASURIES – THE LAST LINE OF DEFENSE PT-5: The epic rates rally we saw into the weekend and during the oil collapse on Monday, given the magnitude and examples of what happens in a flash rally, has likely left dealers with many older USTs called off-the-runs. @BChappatta
7/ US TREASURIES – THE LAST LINE OF DEFENSE PT-6: Did all longs crush it”? As with all things in life, too much speed can kill, in this case liquidity at the expense of unrealized gains. When a +20trn market is trading odd lots, it’s hard to monetize those gains. @lisaabramowicz1
8/ US TREASURIES – THE LAST LINE OF DEFENSE PT-7: What tends to happen is a cascading event of safe guarding liquidity for those that need it and being selective out the stack. You also tend to see a shift towards using derivatives to offlay risk, e.g. Treasury futures. @FerroTV
9/ US TREASURIES – THE LAST LINE OF DEFENSE PT-8: Even across the curve various maturity points behave different under fast moving markets. The 30yr bond has seen some spectacular price changes (and wide bid/offer too) but trades sizes can be fractions of 2yr USTs. @siddiqui71
10/ US TREASURIES – THE LAST LINE OF DEFENSE PT-9: Remember not all Treasuries are funded with cash, the repo market plays a big role, especially funds provided from the money market complex. When collateral vol increases, it impacts haircuts, challenges liquidity. @TheBondFreak
11/ US TREASURIES – THE LAST LINE OF DEFENSE PT-10: I tend to have a love/hate relationship with UST supply. During expansions on the margin it should push up rates, all else equal, into or in a recession there can be moments where it feels like there is a shortage. @LukeGromen
12/ US TREASURIES – THE LAST LINE OF DEFENSE PT-11: USTs are a special asset that everyone needs to see operating in tiptop shape (for collateral, to fund our government now and in time of need, for infrastructure etc) or else it crowds out risk assets in the process. @mtmalinen
13/ CONNECT THE DOTS PT-1: As I wrote in @macro_hive (see link tinyurl.com/ue7h7b8) there are not enough s/t bonds in the system when there is a mad dash for cash. Cash will go to banks but usually when investors sell stocks it goes into a money markets first. @tomkeene
14/ CONNECT THE DOTS PT-2: Post GFC there are less S/T credit instruments for many reasons and Treasury still needs to issue more T-Bills. Meanwhile the Fed is buying $60bn a month of what money market funds (and those taking profits on the curve) ultimately want. @pboockvar
15/ CONNECT THE DOTS PT-3: Post GFC there are less S/T instruments as a result and Treasury still needs to issue way more T-Bills (see link tinyurl.com/roz2p7n). Meanwhile the Fed is buying $60bn a month of T-Bills (what money market funds now need). @mccormickliz
16/ CONNECT THE DOTS PT-4: At some point Fed will need to stop crowding out mmkt investors and buy less bills or just proportionate to size of market (and ultimately launch #realQE out the curve). Fed will also need bigger repos until that hand-off to QE takes place.@BradHuston
17/ CONNECT THE DOTS PT-5: I don't buy idea they cannot ease via USTs. I co-wrote in @Quillintel they may not get same bang for buck as before (should have saved ammo) but at the end of the day the US needs a liquid UST market so Fed will do QE (as it did in WW2). @DiMartinoBooth
Please @threadreaderapp unroll - thanks!
There you go - thx Fed for reading! newyorkfed.org/markets/opolic…
