Signs of deterioration in U.S. Treasuries liquidity: N.Y. Fed blog

NEW YORK (Reuters) - There are some signs of a decline in liquidity in the U.S. Treasuries market, though overall, how easily government securities can be bought and sold remains "fairly favorable," according to a New York Federal Reserve blog post on Monday.

Traders have been concerned about Treasury market liquidity amid speculation over a possible Federal Reserve interest rate hike, perhaps as early as September.

The cost of how quickly investors and traders can convert a Treasury security into cash or vice versa is critical for financial markets because a U.S. government bond is considered the safest and most liquid in the world.

"Direct measures such as the bid-ask spread point toward liquidity that is quite good by recent historical standards. Other measures such as quote depth and price impact imply some recent deterioration in liquidity, albeit from unusually liquid conditions," New York Fed analysts Tobias Adrian, Michael Fleming, Daniel Stackman and Erik Vogt wrote in the post.

The bid-ask spread, or the difference between the highest bid price and lowest ask price, on a Treasury security widened to nearly 3.5 basis points at the height of the global credit crisis in late 2008. It eventually retreated and has stayed at a historical level of about 1.5 basis points.

"Other measures paint a less sanguine picture of Treasury market liquidity," the analysts said.

A measure of decreased liquidity is less market depth, which is defined as the average quantity of Treasuries for sale or purchase at the best bid and offer prices, they said.

While depth improved after the global financial crisis, they fell "markedly" during the 2013 taper tantrum and the "flash crash" on Oct. 15, 2014, the analysts said.

Other signs of diminished Treasury liquidity include the greater effect on prices per $100 million in net orders and smaller trade size.

Monday's post is the first of a six-part series that looks at the "evolving nature of market liquidity."

For more, click on ((http://nyfed.org/1fkndby))

(Reporting by Richard Leong; Editing by Bernadette Baum)

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