Treasury Liquidity Crisis Looms As Election Nears

Authored by Simon White, Bloomberg macro strategist,

Liquidity in the Treasury market is set to deteriorate due to an array of self-reinforcing factors. As the US election approaches, rising yield volatility will exacerbate liquidity pressures from constrained dealer balance sheets, while further out, liquidity will be challenged by the re-emergence of inflation risks and swelling government issuance.

Liquidity is the lifeblood of markets. Without it pricing less reflects fundamentals, but rather the ability or willingness of market participants to trade an asset. Nowhere is that more essential than US Treasuries, their yield the single most important price in global markets. So when it looks like bond-market liquidity is worsening and yields are rising, it’s wise to take note.