Morgan Stanley: Liquidity Stress, U.S. Treasury Market Margin Call Underway

BlockBeats News, March 26th – Morgan Stanley's interest rate strategist stated that the sell-off in the U.S. Treasury market this month has the characteristics of a forced unwinding of positions in two-year Treasuries — as traders abandon Fed rate cut bets and begin pricing in rate hikes, the two-year U.S. Treasury yield has surged.

Morgan Stanley's strategists, led by Eli Carter, noted in a report on Wednesday that during the period since the U.S. attacked Iran on February 28th, trading data from BrokerTec Inc., the trading platform owned by CME Group Inc., showed that "the U.S. Treasury market's liquidity has significantly decreased, especially at the front end." They noted that longer-dated bonds, such as the 10-year U.S. Treasury, remained relatively stable.

The strategists stated: "Wider bid-ask spreads typically hinder trading, and the fact that trading volumes are still recovering reflects that many trades are done out of necessity rather than willingness." Since the conflict began, the two-year U.S. Treasury yield has risen by about 50 basis points to 3.87%, but Morgan Stanley stated that their analysis shows the sell-off has been "exacerbated by position unwinding and deteriorating liquidity conditions." (FXStreet)