Treasuries paradox: Record daily volumes vs flat annual volume

Published on 1 February 2021

Analysis from Greenwich Associates found several days with over US$1 trillion in daily volume, beating previous record s by about US$200 billion – yet volumes were only us 2% year of year. Government intervention had a significant impact in calming markets, but also the interdealer market on central limit order books were collectively down, while dealer-to-client platforms saw greater rises.

Kevin McPartland, head of market structure and technology research at Greenwich outlines the reasons behind activity in rates markets over 2020 and across the year end period.

Dan Barnes Welcome to TRADER TV, I’m Dan Barnes. Last year saw severe disruption in the US Treasuries market, especially in March during the sell-off and trading volumes have not quite recovered ever since. With me today is Kevin McPartland, head of market structure and technology research at Greenwich Associates, and we’re going to be talking about lessons learned from 2020 and also how trading activity has looked over December in the New Year period.

Kevin, welcome to the show.

Kevin McPartland Thanks for having me, Dan.

Dan Barnes So you guys have done some great analysis on what happened last year. Could you tell us what the key takeaways are from your perspective?

Kevin McPartland So we saw some incredible records back in March and really in late February. Late February, we saw the futures market volumes really spike to records. In March, we saw Treasury volume spike to records. We had a number of days were over a trillion dollars in treasuries traded in a single day, which is just incredible. The previous record was about 800 billion a day when the average sort of over the previous year had only been about between about 5 and 600 a day, so really incredible activity. But what I found particularly interesting now that we’ve been able to analyze the entire year’s worth of activity is Treasury trading average daily volume to 2020, we’re up only 2% from 2019.

It shows you how calm the year became once the Fed stepped in. The same is true for volatility measures in the Treasury markets, so looking at the ICE Bank of America move index, which measures rate volatility; that was only up 6% year-over-year. So it’s really incredible how calm in the end the full year was, and a lot of that goes back to government intervention.

Dan Barnes We’ve seen data from some of the electronic trading platforms in the D2C client area, which suggests that towards the end of the year, they were still seeing volume significantly up on 2019. Could you break down where you saw volumes up and down? What potentially that might mean?

Kevin McPartland Yes, so one of the more interesting things that seems like it has stuck with us still is that order book volumes, so you can think about the major platforms now are BrokerTec, NASDAQ Fenex, as a collective, those volumes were down relative to the total market, whereas the dealer-client activity, mostly in the RFQ markets, which is mostly Tradeweb and Bloomberg, were up as a percentage of the total market. And that trend, which we wondered back in the spring and in the early summer if that was something temporary, that would eventually sort of fade; It has still stuck with us. Obviously, we’re still not in normal times, we could revert back to the normal, but it does seem that the use of aggregated price streams coming from dealers, and then also internalization of trades at the dealers, could now be having an impact on the order book market.

And then the other piece is futures volumes relative to the cash market are also down and have been down. There’s definitely been some recovery in the fourth quarter, but we wonder if some of those cash to Treasury futures arbitrage trades that went completely wacky in the spring, some of the smaller firms that were in those strategies backed away, and so the diminished amount of activity with that trade has kept those volumes down, both in the order book and in the futures market.

Dan Barnes And so typically that’s going to be in the interdealer market. And so, as you mentioned, banks off-setting their risk either by crossing internally or perhaps trading into the dealer-to-client market more. Does that have any potential implications of the D2C market or do you think the banks are sort of absorbing that?

Kevin McPartland I think the clients have good liquidity, they have access to liquidity, they feel that transparency in the market is quite good in fact. They already were in a good place, this potentially could have benefited those clients over time. Really what the order book market and the futures market come down to is risk management for the dealers. Clearly, the dealers have not stopped risk managing their books. It seems as if maybe they’ve just found some new ways that are maybe cheaper, quicker to do that than they had been doing in the past.

Dan Barnes Then the other thing we’ve seen about the interdealer markets of course is, the potential application of reg ATS to the central limits order book Treasury trading platforms, which would be interdealer largely. Obviously that has still to play out, but again, that could create either more transparency or impact the markets as well, do you think?

Kevin McPartland Yeah, I think one thing it points to, like I said volumes have been down in those markets, but we should remember how important those markets still are. They’re still very robust. They still are where benchmark prices are generally set. And that’s exactly why the SEC is looking at increased oversight in those marketplaces, because of their importance to the overall Treasury market. And one could argue to the capital markets as a whole. I think the wild card in those regulations now is we have a new administration in Washington. We’re going to have a new chairman of the SEC, Gary Gensler. Whether or not fixed income proposals and changes will be high on the priority list, it seems they might spend more time focused on consumer issues. For better or worse, fixed income market structure, it’s always been a little bit a second priority, it seems to the SEC, who does tend to be more focused on equity markets. So time will tell, but it’s definitely an interesting development, it’s something we’re going to watch closely.

Dan Barnes How is trading activity in the rates markets looked in December and then across the New Year period?

Kevin McPartland Transaction volumes in January is up a bit, which is great, I think we’re averaging a little over 600 billion a day. I think the new administration, the talk of fiscal stimulus, and again, I’m not an economist, but we see 10 year yields are tracking up, so the sentiment is positive, there is more activity. It should be an interesting year, hopefully for everybody. It can only be a better year, but there definitely is a lot of uncertainty, although uncertainty often leads to more activity. So we definitely could expect some of that.

Dan Barnes Do you have any views on the rates markets in Europe at all?

Kevin McPartland Yeah, so that’s something we’re digging into a little bit more now. Obviously, MiFID II, well understood at this point, it does seem that there’s been growth in activity there. Government bond markets in Europe; it’s a very different dynamic than in the states where it’s really just US Treasuries. It’s effectively one country’s government bonds as opposed to many country government bonds. It could be interesting there. Time will tell.

We’re also doing some looking to understand there have been some technology innovations that have worked in the US or have worked well in Europe that maybe haven’t been picked up in the other market. I think in the end, in both the US, Europe, the UK, there really is a push for better efficiency, better workflows, more automation in the marketplace, not just the execution piece, but full end to end. And that’s something that I think will will be a big focus for the buy-side and the sell-side through 2021.

Dan Barnes That’s been great. Kevin, thanks so much.

Kevin McPartland All right. It was a pleasure talking with you, Dan, thanks.

Dan Barnes I’d like to thank Kevin for his insights and, of course, to you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET or ETFTV.NET.