(Bloomberg) -- JPMorgan Chase & Co. strategists called for the U.S. Treasury to replace older government bonds with current benchmarks to address liquidity strains in the world's biggest pool of risk-free securities.
Treasury market liquidity has dried up at times amid the tumult caused by fears over the economic hit of the coronavirus and the shock emergence of an oil-price war. Trading-platform order books have thinned out to a degree last seen during the 2008 financial crisis. The one-week average of Treasury-market depth has dropped to just $42 million in the 10-year sector, down 75% over the past month, according to JPMorgan.
“It could be beneficial if Treasury began conducting large-scale buybacks in less-liquid, financing-intensive off-the-runs and replaced them with on-the-run securities,” strategists led by Jay Barry and Jason Hunter wrote in a note Wednesday.
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Such a move would resurrect a tool the Treasury Department used to maintain market access while running surpluses during the 1990s.
Back then, the Treasury bought back off-the-run debt, while still issuing on-the-run securities. Currently the government has deficits instead of surpluses, but the Treasury continues to conduct small buyback operations to maintain operational readiness, JPMorgan said, citing two test operations last year.
This step wouldn't address other challenges, such as the potential disruption to banks' dealing rooms from the virus itself.
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“At its root, it's clear that Treasury-market liquidity is fragile, largely due to changes in market structure over the past decade,” the strategists wrote. “This cannot be turned around quickly.”
Moves of 10 and 20 basis points per session have been common in Treasuries amid the turmoil. At one point a few days ago, the entire U.S. yield curve was below 1%. And the ICE BofA MOVE Index, which measures volatility in Treasury options, on Monday reached its highest level since June 2009. Some strategists have even called into question the safe-haven qualities of Treasuries amid the turbulence.
The 10-year yield ended last year at 1.92%, then fell as low as 0.31% on Monday before rebounding. It was at 0.685% as of 9:10 a.m. in New York Thursday.
--With assistance from Elizabeth Stanton.
To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Elizabeth Stanton
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