dChan - Q Origins Project Archive

More trouble is brewing in the $24 trillion Treasury market: This time, it’s about central clearing

Efforts to reduce risks within the nearly $24 trillion U.S. Treasury market, the world’s deepest and most liquid securities market, are ironically creating angst among market players.

The anxiety is centered on the concept of central clearing, a method used to reduce and manage risks in financial markets. In September, the Securities and Exchange Commission proposed rules that would mandate the central clearing of a large swath of Treasury transactions. Only a small percentage of such transactions have centrally cleared in recent years. The biggest concern about central clearing is the cost of participating in it, according to a panel discussion at the 2022 U.S. Treasury Market Conference held at the New York Fed on Wednesday. Though panel participants generally agreed that the efforts would help to improve the Treasury market’s resiliency, they said that some players might not be able to absorb the additional costs and that it’s not clear how well the central-clearing system would work during periods of turmoil. “The cost of transacting in the Treasury market is going to go up and, as dealers, we are concerned about that,” said Kavi Gupta, co-head of global rates trading and counterparty portfolio management for BofA Securities. Though larger players may adapt, smaller ones may not and the topic is “something our clients actively talk about.” Concerns about liquidity in the Treasury market have been brewing for months, particularly as the Federal Reserve’s quantitative tightening process kicked into high gear. In October, BofA Securities warned that the “fragile” market was at risk of “large scale forced selling” or a surprise that might lead to a breakdown. And earlier this month, the Fed confirmed fears about low liquidity in what has historically been one of the financial system’s most stable corners. Earlier on Wednesday, New York Fed President John Williams told conference participants that the Treasury market’s liquidity problems have the potential to interfere with the central bank’s ability to transmit monetary policy to the economy. Meanwhile, Nellie Liang, undersecretary for domestic finance at the Treasury Department, said that the UST market needs to be monitored for vulnerabilities, given the risks of a potential shock.

https://www.marketwatch.com/story/more-trouble-is-brewing-in-the-24-trillion-treasury-market-this-time-its-about-central-clearing-11668618706

Spread on 2- and 10-year yields heads for its deepest inversion in more than 40 years

The spread between 2- TMUBMUSD02Y, 4.369% and 10-year Treasury yields TMUBMUSD10Y, 3.694% shrank to as little as minus 67 basis points on Wednesday, and was headed for its deepest inversion in more than 40 years. The inversion was being driven by a steep drop in the 10-year yield which fell 11 basis points to below 3.7% in New York afternoon trading. The 2y/10y spread is regard as one of the bond market's most reliable gauges of an approaching U.S. recession, and a deeply negative inversion signals that the recession could be severe. The last time the spread has inverted by so much was on Feb. 18, 1982, when it went to minus 70.5 basis points.

https://www.marketwatch.com/story/spread-on-2–and-10-year-yields-heads-for-its-deepest-inversion-in-more-than-40-years-2022-11-16