Goldman: Large Yield Moves On Average Volumes

Goldman Sachs note that “despite the appearance of a disorderly selloff, Treasury market microstructure data appear more benign.”

• “Yield curve dispersion and liquidity metrics have not deteriorated noticeably through the selloff, and data from both FR2004 (primary dealer transactions) and FINRA TRACE suggests only a small uptick in trading volumes.”
• “The latter two datasets however do suggest elevated trading in the 10-20y sector.”
• “We suspect this may be partly due to the negative convexity in the US contract as the CTD has extended to higher maturities.”
• “However, the actual DV01 delivered to investors owning these futures contract because of this extension isn’t large enough to have played a major role in the selloff, in our view.”
• “Could large supply/demand imbalances or stop outs have caused the repricing? Ordinarily, we would expect such imbalances to clog up dealer balance sheets and lead to a deterioration in liquidity metrics, and stop outs show up in elevated volume data.”
• “We do not see signs of either.”
• “Rather, the rapid re-adjustment of price appears to be allowing for an orderly clearing of markets and to be compensating for lagging buying interest.”
• “Bid sizes appear to be lagging ask sizes in TY contracts, and we believe this gap is likely the result of investors preferring to “chase the rally” rather than attempting to pick the top. If true, we would expect yield moves to be exaggerated in both directions.”