The One Table That Explains Why There No Longer Is Any Treasury Liquidity

Earlier today, former CLSA strategist Russell Napier mused about the centrally-planned capital markets, pointing out the historic move in bonds in the morning of October 15 about which he said:

On the 15th of October 2014, as this analyst celebrated his 50th birthday, volume in the US Treasury market surged, suddenly and without warning, to a record high. Old timers smiled knowingly, as Magwitch did from behind the headstones, and younger members put aside their Angry Birds and wondered what was wrong.


There it was --- a real market come and gone in half an hour, like a pregnant panda at Edinburgh zoo. What did it mean and what should you do? You should pay attention to what happens to the direction of prices when volumes surge and markets work. When the veil is lifted, pay attention to what you see beneath. Last Wednesday, in the space of half an hour of active trading, the Treasury market had one of its most rapid rises ever recorded and equities fell sharply.


There is a very simple lesson that when the markets finally break through the manipulation they move to price in deflation and not inflation. This is key because it means financial repression has failed. Such repression requires the artificial depression of interest rates but, crucially, it must be paired with boosting inflation above such rates. On October 15th 2014, if only for a few short minutes, market forces broke out and the failure of central bankers was briefly evident.

He may be right or wrong, but fundamentally there is a far simpler explanation of the events that took place that morning, one that requires just two words:

  • no liquidity

As we have been pounding the table since late 2012 when we explained how the Fed's QE3 would soak up a record amount of 10 Year equivalents from the private market, what the Fed has done is take its holdings of all CUSIPs across the curve to above the level it that previously considered was the threshold limit over which bond market liquidity becomes seriously impaired. We forecast most explicitly what would happen last May when we wrote: "As Of This Moment Ben Bernanke Own 30.5% Of The US Treasury Market... And Will Own All By 2018."

Of course, the Fed knew all of this, which is why back in December 2010, in a little noticed move, the New York Fed raised the SOMA Treasury limit from 35% to 70% per CUSIP, meaning that while previously the Fed could only hold up to 35% of any given Treasury CUSIP, since then it was allowed to take its holdings to over two thirds of total! Indicatively, the number 35% was there because based on extensive literature, liquidity begins to collapse around the time there is just below two thirds of the original outstanding notional of any given issuance left in circulation.

So where are we now? Well, as of the most recent data, as compiled by Stone McCarthy, the amount of ten-year equivalents held by the Fed was $1.947 trillion leaving some $3.674 trillion in 10Year equivalents available to the private sector. Or, in percentage terms, just about 34.57% of all 10 Year equivalents outstanding. Call it 35%.

However, as noted, that is a blended average of all Fed TSY holdings across the curve. Where things get really bad is when one focuses on what once upon a time was the On The Run issue, i.e., the most liquid bond on the Treasury curve: the 10 Year.

It is here where as Brean Capital's Peter Tchir shows in the table below, that the Fed is now the proud owner of over half of the total outstandings in the entire 10-15 Year bucket!

In short: the simple reason why there is no more liquidity in cash Treasury securities (Treasury futures are a different matter entirely) is because the Fed is now the proud owner of a majority stake of what once was the most liquid maturity across the most liquid bond market in the world.

So the next time the market freaks out and bonds have a 12 sigma move, once the shock and awe passes, fee free to send your thank you cards to the Marriner Eccles building for destroying what once upon a time was the deepest, most liquid market in the world.