At our recent Reserve Management Seminar, the lack of depth in the US Treasury markets as well as the risk of liquidity events in private markets were seen as the biggest pain points.
For 20 years, the Treasury market has been supported by a couple of “visible hands” that are largely now being withdrawn. First came China’s decision to build up its stock of US Treasuries, then came the quantitative easing programs in response to the global financial crisis (GFC), the Eurozone crisis and the Covid-19 pandemic.
It is these epoch-defining shifts that are generating such uncertainty in the Treasury market; it is therefore no surprise to see this reflected in such high volatility. Another defining feature of the pre-pandemic period of ultra-low interest rates and QE has been the “search for yield”. As investors struggled to generate returns in fixed income markets they turned to riskier assets: equity and more importantly from a liquidity perspective, alternatives.
We therefore decided to explore these issues further. In this paper, our Global Sovereign Markets team first analyze the liquidity situation in US Treasury markets and go on to give an overview of liquidity dynamics in private markets.