LIQUIDITY IN THE U.S. TREASURY SECURITIES MARKET - SHOULD WE BE CONCERNED?
The U.S. Federal Reserve Bank of New York has prepared an analysis of liquidity in the U.S. Treasury securities market. The Bank found that the market has been relatively illiquid in 2022. Bid-ask spreads – one of the most popular liquidity measures – widened in 2022 but remained well below levels observed during COVID-related disruptions in March 2020. Order book depth (i.e. the average quantity of securities available for sale or purchase at the best bid and offer prices) also points to relatively poor liquidity in 2022.
Should we be concerned? Yes, says the Federal Reserve. The market has less capacity to handle large flows. Moreover, a liquidity shock will have larger-than-usual effects on prices. Given the importance of Treasury securities in financing the U.S. government, and as a risk-free benchmark for pricing other financial instruments and in implementing monetary policy, close monitoring of Treasury market liquidity remains important.