A Wakeup Call for the Bond Market?
06/20/2013 8:30 am EST
The recent double-digit drop in bond prices has exposed some related problems that many were not expecting, says MoneyShow's Jim Jubak.
The characterization of the US Treasury market is that it's the deepest, most liquid market in the world, and therefore safe. I think the sell-off in bonds from the end of April to, say, June 7, which was about 10.5% or 11% for US Treasuries according to the Bloomberg Treasury Index, really sort of shows the limitations to that characterization—liquidity exists, but it's really buyers and sellers that matter.
So if you have a big position where there has been a lot of people buying that position, and therefore pretty much everybody's portfolio is chock-full of this stuff....when you get to a position where people want to sell, it doesn't matter that the market as a whole is liquid. It matters that when you try to sell there aren't any buyers.v
That's what I think has been happening in the Treasury market. As people have been worried for this short time period, maybe longer, about the Fed getting out of the business of buying Treasuries and mortgage-backed securities and interest rates going up, you've had a real paucity of buyers.
You've had a lot of people wanting to sell, but very few people saying, "Well, I think at 2.23% on a ten-year Treasury, as opposed to 2.175%, I want to throw my money into it because that's a great buy." Six basis points is not enough to make a difference, so what you've had is a very, very liquid market in terms of the amount of players in it, the amount of money in it, the amount of transactions, but you've had relatively few people wanting to buy on the long side.
That really means that when you're looking at these markets, it's not liquidity in some kind of abstract way that counts, it's the question of how big the positions are and how many people you think there are who are going to be interested in buying...and at what price.