How a Little Known Trade Upended the U.S. Treasury Market
- Liquidity preference lifted futures, crushing basis trades
- Futures-cash spread led to reallocation from funding markets
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It is said that liquidity is a coward, it disappears at the first sign of trouble. What happened in Treasuries last week was one example of this, as problems in one small corner of the bond market helped spark a liquidity crisis in another that lead to a $5 trillion Federal Reserve promise to calm markets.
As coronavirus cases spiked around the world and unprecedented travel restrictions multiplied, investors rushed to Treasuries -- the default risk-free asset. But even the Treasury market has a hierarchy of liquidity -- so they rushed to futures first rather than cash bonds, driving spreads between the two much wider.