According to JPMorgan Chase & CoAccording to data, an indicator of market depth has fallen to the lowest level in more than five months.
The impact of each transaction in the Treasury market is close to the upper limit of the range observed over the past year.
Liquidity in the world's largest bond market is deteriorating and traders are on high alert for clues to the Fed's downsized bond purchases at next week's annual meeting in Jackson Hole.
According to JPMorgan Chase & Co, a market depth indicator has fallen to its lowest level in more than five months. The yield on the 10-year note hovered around 1.25%, up from a six-month low of 1.13% hit on Aug. 4. Although the stronger-than-expected non-farm payrolls report in July gave a boost to yields, economic growth concerns caused by the surge in COVID-19 cases also weighed on yields.
The so-called market depth refers to the ability of the market to withstand large transactions without significant fluctuations in securities prices, which is an index to reflect the liquidity of the securities market.
"the depth of the Treasury market has continued to decline in recent weeks and is now at its lowest level since early March," JPMorgan Chase & Co strategist Jay Barry and his colleagues wrote in a report. "in addition, the price impact has also increased, suggesting that the impact of each transaction in the US Treasury market is close to the upper limit of the range observed over the past year."
More common
Some of the current market conditions are common in August, when many bond traders take time off. But for years, they have been saying that liquidity shortages (sometimes severe short-term) have become more and more common.
Related reading: the liquidity of US Treasuries dries up and the global asset value of $50 trillion becomes a problem.
Markets will be watching closely for clues about the reduction plan in the minutes of the Fed's July meeting released on Wednesday.
The Fed currently buys $120 billion of securities a month, including $80 billion of Treasuries and $40 billion of mortgage-backed bonds (MBS).