Ten days ago, in "Why There Is No Treasury Liquidity In One Chart [6]" we explained quite simply why there is no more Treasury market liquidity. To wit:
... while the Fed's holdings expressed in 10 Year duration terms have so far peaked at around 35% of total, a level which many expected wouldn't be dire enough to lead to the evaporation of bond market depth also known as liquidity, what happened since then is that coupled with the surge of HFTs in bond market trading which contrary to popular opinion not only doesn't provide, but soaks up liquidity, the 30% 10 Year duration threshold which had previously been greenlighted by the TBAC, ended up being far too high and as a result events such as the October 15 flash smash, and the May 2015 Bund flash crash, have become a normal and regular feature of the fragmented, central bank-manipulated and HFT-dominated markets.
Today, for the first time ever and in a very shocking development, the Fed admitted not only that at least one half of this assessment of bond market liquidity is accurate but that what Zero Hedge has been saying since 2009: that HFTs do not provide liquidity but soak it up, has been absolutely correct. From the FOMC minutes:
... it was suggested that the tendency for bond prices to exhibit volatility may be greater than it had been in the past, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds.
As for the accuracy of the other half of our statement, which would entail the Fed admitting that terminally low bond market liquidity is due to both HFTs and the Fed itself, we are willing to wait for that particular admission. After all, that would mean the Fed finally admits the past 6 years have done nothing more than lead to the most rigged capital markets in history.
Such an admission would also implicitly suggest an immediate return to normal markets. Which by definition would lead to the biggest market crash in history.
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As for the Fed blaming HFTs for reduced liquidity, pay attention: when the market does crash, guess who the Fed will promptly blame for wiping out trillions in "unbooked profits"...
