New York Fed Finds 4% of Treasuries Drive 65% of Trading as Older Bonds Lose Liquidity
Updated
Updated · Liberty Street Economics - · Jun 30
New York Fed Finds 4% of Treasuries Drive 65% of Trading as Older Bonds Lose Liquidity
2 articles · Updated · Liberty Street Economics - · Jun 30
Summary
Less than 4% of the more than $30 trillion Treasury market—newly issued on-the-run securities—accounted for 65% of average daily trading volume, while older off-the-run bonds traded less and at higher cost, New York Fed research found.
TRACE data showed trading shifts sharply once bonds age: in the 2-year sector, daily volume fell from $56.3 billion on-the-run to $5.5 billion for the first off-the-run and $1.6 billion for the second.
Liquidity also deteriorated as effective bid-ask spreads widened; in 2-year notes, spreads rose from 0.66 basis points on-the-run to 1.22 for first off-the-run and 2.23 for second off-the-run, with stress amplifying the gap in March 2020.
Market structure changes with that aging: from January to June 2024, on-the-run notes and bonds averaged $262.9 billion a day in ATS and interdealer trading versus $174.8 billion dealer-to-customer, while off-the-run issues flipped to $51.3 billion versus $103.3 billion.
Cheapest-to-deliver bonds for Treasury futures were a key exception, gaining about $1.31 billion in extra daily volume in the 5-year sector, showing older securities can stay active when they remain central to hedging and delivery.