Wednesday morning Kevin McPartland, head of research at Greenwich Associates, and his U.S. Treasury Market: Key Takeaways From March 2020 panelists dug into what happened in the market during that remarkable month.
The Managed Funds Association’s Ben Allensworth said that his members faced various pressures especially from the transitory dislocations between cash and futures and on-the-run and off-the-run cash Treasuries. Some got out of positions and some stayed in, as one would expect given the variety of strategies deployed by hedge funds.
According to Elisabeth Kirby from Tradeweb, as trading volumes exploded across the markets, the markets handled the trillion dollar trading days well, with traders showing a remarkably high level of comfort with electronic trading. She said that during previous episodes of market volatility, customers often reverted to telephone trading, but this time trading platform volumes boomed. Some traders who had been used to using automated execution functions returned to the traditional electronic RFQ apparently which had become their go-to comfort zone.
Banks were at the center of the Treasury market and probably none more so than JPMorgan. The bank’s head of rates automated trading systems, Jamie Montimore, said that general balance sheet pressures at the time affected the market’s ability to provide liquidity as pension funds and foreign financial institutions looked to sell out of their portfolios. When the Federal Reserve Bank stepped in to save the market as the Fed’s balance sheet burgeoned from about twenty percent of GNP to thirty-five percent. JP was able to keep up their own auto-quoting. Montimore agreed that e-trading really held up.
As a proprietary trading firm active in all aspects of the Treasury markets, DRW naturally can be a buyer or seller. Larry Weithers from DRW said that the demand for liquidity could not be satisfied until the Fed started to buy, although it first tried to address liquidity with financing operations. “The primary problem from where we sat was that the supply of liquidity was too small to handle the volume of selling,” Weithers said. He also said he thought working from home added to electronic trading volumes but that the isolation among traders hurt liquidity because access to information was impeded.
Citadel’s Stephen Berger noted that with Treasury issuance having grown by fifty percent over the past six years, the market was already huge. During the March market crisis, even though trading seemed illiquid, there were several trillion dollar days meaning that bonds were being sold. “There was broad based selling as there was a dash for cash,” Berger said, noting that real yields being below zero meant it was a good time to sell.
After the panelists offered their market overview comments, McPartland asked about whether problems in the futures basis had been overblown by market observers. The market at the time felt broken, according to DRW’s Weithers, giving rise to concerns about informational asymmetries between cash and futures. But, since futures-to-cash is a spread, one can’t really isolate one side or the other.