Odd Lots How The Crisis Nearly Blew Up One Of The World’s Safest Trades
Mar 26, 2020
Josh Younger, a managing director at JPMorgan, shares his expertise on the U.S. Treasury market, discussing how recent volatility has disrupted this typically stable haven. He delves into unusual asset sell-offs and liquidity issues that have emerged, driven by high-frequency trading. Younger also sheds light on the implications of these changes for the Federal Reserve and the financial system. Additionally, he addresses the complexities of navigating the levered Treasury market and the operational risks that arise during crises.
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Treasury Volatility
- The recent U.S. Treasury sell-off highlights a critical market vulnerability.
- Even the safest assets can experience unexpected volatility during extreme stress.
Futures-Cash Divergence
- The divergence between Treasury bond futures and cash bonds stemmed from a rapid shift in market fundamentals.
- This shift, driven by changing growth expectations and a flight to quality, made it difficult for market participants to act as buyers or sellers effectively.
On-the-Run vs. Off-the-Run
- Discrepancies between on-the-run and off-the-run Treasuries usually stem from factors like coupon rates, accounting treatment, and liquidity differences.
- These discrepancies became more pronounced during the recent market volatility, complicating risk management for dealers.