Executive Summary

Key Takeaways from April Data

  • Average daily volumes were at their lowest point since September of 2018, reflecting low volatility in April.
  • The Greenwich U.S. Treasury market sentiment score was 3.5 (out of 5) in April, a level that is positive, yet cautious.
  • Trader views on liquidity remained positive, with investors, dealers and electronic market makers all on the same page.
  • Off-the-runs are gaining more traction on electronic trading venues, although progress remains difficult to precisely measure.
  • UST futures volumes were down relative to cash, but open interest continues to grow. SOFR futures volumes and OI stalled out.

UST Market Sentiment - UST Liquidity Sentiment

Key Takeaways from April Data

  • Average daily volumes were at their lowest point since September of 2018, reflecting low volatility in April.
  • The Greenwich U.S. Treasury market sentiment score was 3.5 (out of 5) in April, a level that is positive, yet cautious.
  • Trader views on liquidity remained positive, with investors, dealers and electronic market makers all on the same page.
  • Off-the-runs are gaining more traction on electronic trading venues, although progress remains difficult to precisely measure.
  • UST futures volumes were down relative to cash, but open interest continues to grow. SOFR futures volumes and OI stalled out.

UST Market Sentiment - UST Liquidity Sentiment

Volumes are Down, Liquidity Remains Intact

April was a tough month for nearly everyone that makes money based on market turnover, while trader sentiment remained positive, yet cautious. The average daily volume (ADV) for U.S. Treasuries in April was just below $530 billion, an 11% drop from the month before and the lowest level since the 3rd quarter of 2018. Reduced volatility for most of the month was both a cause and effect of the volume decline.

Volatility remains amazingly low in both fixed-income and equity markets, given what can only be considered constant market uncertainty due to trade wars, Fed surprises and a general belief that markets have been so good for so long that a “correction” can’t be far away. But based on responses from key traders at buy-side, sell-side and electronic market-making firms, overall U.S. Treasury market liquidity remains positive (with an average rating of 4 out of 5) and general sentiment is slightly positive (with an average rating of 3.5 out of 5).

Order Book Use Proves Volatile

Nevertheless, trading venue volumes fell similarly to overall market volumes, with each down 10–20% month-overmonth. After a few bumpy months, BrokerTec and Nasdaq are back to tracking each other’s monthly gain or loss almost exactly. FENICS was the sole exception, with its ADV up about 12%. Electronic trading between clients and dealers stayed flat, while overall market e-trading dropped slightly. This demonstrates again that asset managers and hedge funds in the U.S. Treasury market are quite consistent in their trading methods, whereas electronic market makers react more quickly to both market changes and structural changes at the individual platform level.

U.S. Treasury Channel Usage

To that end, use of central limit order books (CLOBs) tends to be more volatile than use of other electronic trading methods, such as RFQ and bilateral pricing streams. This is largely due to the activity of electronic market makers whose volumes jump when markets are more volatile. But the steady state of trading via bilateral streams—a segment where electronic market makers also play an increasingly large role—could be a sign that markets with name disclosure ultimately operate more calmly. Even if that is the case, it still must be said that this is a big market and each trading method has its place—it’s only a matter of how big each ultimately becomes (or remains).

Off-the-Runs

What impact all this market structure change is having on the off-the-run market is still difficult to pin down. While electronification of liquid markets tends to get the market structure headlines, the bigger challenge for trading venues, dealers and investors is improved liquidity-seeking tools for more illiquid securities—notably, deep off-the-run U.S. Treasuries. Unsurprisingly, the phone and RFQ-style markets still dominate here on a volumeweighted basis, but periodic auctions and bilateral streams (primarily for more recent off-the-runs) are starting to pick up steam.

Only regulators have the data available to them to track off-the-run volumes on a monthly basis (more on this in coming months). But based on the latest release of TRACE data by the New York Fed back in 2018, off-the-runs accounted for 28% of the notional volume traded. As our data continues to show, trading by instrument and venue changes month-to-month based on macro factors and market participant behavior changes. But based on observable data and our conversations with market participants, off-the-run volume stays in the range of 20–35% of total U.S. Treasury trading by notional in any given month.

The Libor Transition

U.S. Treasury futures volumes at the CME declined proportionally more than volumes in the underling bond market did, equating to just shy of 57% of volume on a notional basis (down from 63% in March). We don’t believe this is anything structural, however. May volumes are likely to jump back up as the roll approaches, and open interest in April grew steadily despite the volume decline, a trend likely to continue as the market hedges interest rate uncertainty.

The strong growth of CME SOFR Futures Open Interest has calmed quite a bit in the past two months, as has the decline in CME Eurodollar Futures Open Interest. It is true that the utility of Eurodollar futures is at risk, as the Libor transition looms. But it should not be missed that SOFR futures’ open interest is still dwarfed by the open interest of Eurodollar futures—less than 1% as of the last day of trading in April. Another notable benchmark and related future to watch is Ameribor, with futures traded on the American Financial Exchange (using CBOE’s infrastructure).

Kevin McPartland

Methodology

Greenwich Associates continuously gathers data and insights from U.S. Treasury market participants including asset managers, hedge funds, primary dealers, market makers, and trading platforms. The data, once aggregated, normalized and enhanced, is analyzed by our market structure research team who identify key areas of change and the likely direction of volume, holdings, market share and other trends in the coming months.