NY Fed: Report Just Beginning of Treasury Market Scrutiny

The Federal Reserve Bank of New York on Monday reiterated the highlights of a multiagency report last week addressing turmoil in the $12.7 trillion U.S. Treasury market, saying the findings would underpin "discussion of next steps toward a fuller understanding" of changes in the Treasury market.

Researchers in the New York Fed's Liberty Street Economics blog called the 0.37 percentage point trading range seen Oct. 15, 2014 in the yield of the 10-year U.S. Treasury note "highly unusual." It was a move James Dimon, chief executive of J.P. Morgan Chase & Co., said should happen only once every three billion years or so.

That morning, Treasury yields plummeted within minutes, without analysts and observers being able to point to a single direct cause. In bonds, yields and prices move in opposite directions, so the move sent prices in the bonds skyrocketing, before they later settled.

Regulators in the 76-page report released last week called for more scrutiny of publicly available data on the U.S. Treasury market, and a review of whether more data needed to be collected.

The health of the Treasury market is critical because it serves as a benchmark for everything from mortgages to corporate borrowing rates. Regulators have been analyzing the implications of the evolving Treasury market, the New York Fed said, "to support the goal of maintaining a highly liquid and resilient market."

Some of the drivers of the moves on Oct. 15 included weak retail sales data, the unwinding of bearish bets on Treasurys, and a decline in market depth, as broker dealers and high-frequency trading firms reacted quickly to what was happening on their screens.

"Bank dealers and principal trading firms changed their behavior in response to the high volatility," the researchers said. "Liquidity conditions were strained, but volumes reached record highs."

The multiagency report relied on nonpublic trade data on the market from Oct. 15, and was produced by the U.S. Treasury Department, the Federal Reserve, the New York Fed, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

It said "self-trading," where the same firm takes both sides of a trade, increased during the window of time analyzed.

Write to Katy Burne at [e-mail]

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