May 18, 2015

The Markets

The U.S. Treasury market is a bit like a lake in the midst of a drought. All the action – fish, frogs, crawdads, and such – that was once hidden in the depths has become a lot more visible as the water shallows.

For decades, traders and investors have turned to U.S. government debt – Treasury bills and bonds – because the market was so deep that hefty trades could be placed without triggering significant price changes. That’s one reason U.S. Treasuries have long been sought as a safe haven in tumultuous times.

Recently, however, the U.S. Treasury market has become more sensitive to large trades. The yield on 10-year Treasuries rose above 2.3 percent last Tuesday for the first time in months before closing lower on Friday. Some theorize yields are being pushed higher as investors try to stay ahead of Federal Reserve activity or changing inflation expectations, but others say the issue is liquidity.

Liquidity is the ease with which traders can buy and sell bonds. In a highly liquid market, bonds can be bought and sold easily. In a less liquid market, trading becomes more challenging. Bloomberg contends the U.S. Treasury has become less liquid because of financial regulations that were adopted after 2008 to reduce risk taking. The regulations have made bond dealers less willing to hold inventory and facilitate trades. Liquidity also was affected by the Fed, which bought lots of government bonds in its effort to stimulate the economy.

How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.

 

At the close of the 1st Q of 2015 the Wilshire 5000 index which follows the broad market was + 1.78. This year has had a slow start with interest rate worries being a big factor so patience and asset allocations will continue to be very important factors in your portfolio.

 

Weekly Focus

 

“Culture makes people understand each other better. And if they understand each other better in their soul, it is easier to overcome the economic and political barriers. But first they have to understand that their neighbour is, in the end, just like them, with the same problems, the same questions.”
-Paulo Coelho, Brazilian novelist

Image courtesy of Jason Rogers, used in accordance with the Creative Commons Attribution 2.0 Generic license.

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