(Bloomberg) -- Treasuries have been given some respite from the deepest selloff in recent history as concern about slowing economic growth has mounted. Haven demand however has done little to prevent liquidity in the $22 trillion market from worsening even further.
The Bloomberg US Government Securities Liquidity Index -- a gauge of deviations in yields from a fair-value model -- rose on Wednesday to the highest since March 2020, when the early stages of the Covid pandemic wreaked havoc on the economy.
While Treasury yields have declined from their recent peaks as stocks tumbled, heightened volatility has kept some investors on the sidelines and increased frictions in one of the world’s deepest markets. That’s happening even before the Fed starts to trim its massive holdings of Treasuries and mortgage securities, starting next week, as part of its plan to tighten financial conditions to cool inflation.
Liquidity has deteriorated in part because “elevated market volatility saw speculators’ risk appetite shrink,” said Hidehiro Joke, a senior bond strategist at Mizuho Securities Co. in Tokyo. This situation “also adds risk premiums on Treasury yields,” he said.
US government bonds were little changed early Wednesday, after rallying on Tuesday amid speculation Fed policy tightening will send the world’s largest economy into recession. Swaps traders have trimmed bets on Fed rate hikes as the outlook for US economic growth has deteriorated.
Investors are awaiting the release of the Fed’s May 3-4 meeting minutes on Wednesday to evaluate the future path of rate hikes. Governor Lael Brainard will also deliver a speech.
(Updates to add analyst comment in fourth paragraph)
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