March 16, 2020 / 6:45 PM / 19 days ago

Treasury liquidity better but working from home slows down market

CHICAGO, March 16 (Reuters) - The Federal Reserve’s latest measures to address economic fallout from the spreading coronavirus improved U.S. Treasury market liquidity on Monday, but a growing number of market participants fleeing trading floors for home may be slowing things down.

Liquidity problems in the $17 trillion market have persisted since last week in the wake of big swings in prices and yields.

For the second time this month, the Fed on Sunday cut short-term rates, this time to a target range of 0% to 0.25%. It also announced at least $700 billion in Treasuries and mortgage-backed securities purchases in coming weeks. That followed the Fed’s other measures last week to inject liquidity into the system.

In a written commentary, Tony Rodriguez, head of fixed income strategy at Nuveen, said the immediate drop in the 10-year Treasury note yield was “a positive sign that the Fed’s actions may help market liquidity almost immediately.”

“However, the day-to-day volatility will continue to be driven by uncertainty around the coronavirus impact itself,” he added.

Gary Pollack, managing director fixed-income at Deutsche Bank Private Wealth Management in New York, said liquidity appears to have “improved slightly,” but noted the issue of people on both buy and sell sides of the market working from home.

“I think that’s hurting communications and liquidity,” Pollack said. “When everyone’s on the same desk, it’s easy to know where all your risk is. And when everyone’s separated, it’s a little slower. This hampers the normal liquidity that we’ve seen in the marketplace under more normal times.”

Stan Shipley, fixed income strategist at Evercore ISI in New York, cited improvement. “Are things better with the Fed doing what they do? Yes,” he said.

As for the exodus from offices, “I don’t think that makes a big difference,” Shipley said, noting that people staying home are mostly in sales, research and banking, not traders.

But “with so many people working from home, how efficient and how well will these auctions be in the Treasury market?” he asked.

The Treasury Department sells bills several times each week, as well coupon-bearing debt on multiple days roughly every two weeks.

Shipley said with the Fed addressing the monetary piece of the puzzle, the market was now looking for fiscal stimulus, which he noted could involve a “tremendous amount of money” that the U.S. Congress would have to approve.

“It has to be done, given that we’re moving ever closer to a shutdown like Italy and Spain,” he said.

To recover from the Great Recession, President Barack Obama in 2009 signed the nearly $800 billion American Recovery and Reinvestment Act. (Reporting By Karen Pierog; editing by Megan Davies and Richard Chang)

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