LIVE MARKETS-Short-term Treasury liquidity strains as rate-hike bets return
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SHORT-TERM TREASURY LIQUIDITY STRAINS AS RATE-HIKE BETS RETURN
Liquidity in short-term U.S. Treasury markets has deteriorated as traders rapidly reprice Federal Reserve interest rate expectations following the surge in oil prices triggered by the U.S.-Israeli conflict with Iran.
Morgan Stanley analysts found that bid-ask spreads on shorter-dated government debt have widened by roughly 27% compared to February, and are coinciding with large intraday yield swings.
The bank noted that "elevated volumes alongside wider spreads suggest flows are driven by necessity rather than desire." Longer-dated Treasury markets, meanwhile, have remained comparatively calm.
The pressure is being felt most acutely at the front end of the yield curve as market participants dramatically rethink their Fed outlook. Fed funds futures traders have swung from pricing in two quarter-point rate cuts by year-end to now pricing in a possible rate hike.
JPMorgan, meanwhile, recommends buying two-year Treasuries on the view that the current liquidity stress will ease, and that the Fed would likely pivot toward rate cuts if recession risks began to mount.
(Karen Brettell)
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