It was the best of times, it was the worst, least liquid of times ...
but wait, there is to be even LESS over next several weeks!!
With apologies TO Charles Dickens, I couldn’t let this quote from THE (once again) #1 rated bond strategist on all of Global Wall Street slip by without acknowledging …
We would be remiss in a discussion of the price action leading into CPI without acknowledging the current liquidity profile in the Treasury market. There has been an increasing amount of chatter on UST liquidity and a degrading backdrop that is intuitively flowing through to more dramatic swings in prices. Bloomberg’s proxy of US government securities (GVLQUSD Index) has climbed to levels not seen since the height of the dash for cash that defined the early days of the pandemic. Excluding that episode, one needs to look back to 2018 to see a similarly illiquid time in Treasuries. This is all coming at a time when the Fed is committed to pull back from – and potentially poised to decelerate – its bond buying. The mid-December to mid-January outright size of QE is already slated to drop to $60 bn, and in the event Powell opts to accelerate that decline, it is certainly conceivable that the liquidity benefit of the central bank’s bond buying will not persist beyond the first quarter. As the final four trading weeks of the year get underway, a period that was already going to be defined by thinner liquidity now has the added implications of tapering with which to contend.
Food for thought beyond whatever it was that won the day…