Morgan Stanley: Liquidity Deteriorates, Violent Sell-Off in U.S. Treasuries Underway

BlockBeats News, March 26 — Morgan Stanley rate strategists stated that this month's sell-off in the U.S. Treasury market bears the characteristics of forced liquidation in two-year Treasuries. As traders abandon bets on Federal Reserve rate cuts and begin pricing in rate hikes, the yield on two-year U.S. Treasuries has surged significantly. In a report on Wednesday, Morgan Stanley strategists led by Eli Carter pointed out that during the period since February 28, when the U.S. struck Iran, trading data from BrokerTec Inc., an interdealer trading platform under CME Group Inc., shows that "liquidity in the U.S. Treasury market has noticeably declined, particularly at the front end." They noted that longer-term bonds, such as 10-year U.S. Treasuries, have remained relatively stable. The strategists stated: "Wider bid-ask spreads typically suppress trading, and the fact that trading volumes have still rebounded reflects that many transactions are being conducted out of necessity rather than willingness." Since the conflict began, the yield on two-year U.S. Treasuries has risen by approximately 50 basis points to 3.87%. However, Morgan Stanley indicated that their analysis shows the sell-off has been "exacerbated by position unwinding and deteriorating liquidity conditions." (Jin10)