"The US Federal Reserve Bank has
been easing quantitatively (QE) for 4 years now, since 2009. Over this
period, average daily trading volume in the US Treasury market has reduced from
500bln 10yr equivalents per day to 350bln 10yr equivalents. 350bln 10yr
equivs may still seem like a big number...but this is a 30% decrease in trading
volumes, and that is a reduction not only in volume, but liquidity. Some
readers out there might think"so what?" or "whats the big deal
if the US Treasury market is less liquid than it used to be?" The
answer rests in the ultimate lenders of capital, and the structure of the
Treasury market which is of great concern to participants of this market.
Investors (yes, a rarely used word these days) prefer to invest in assets that
are liquid, especially when that asset is designated as a "risk free"
asset. Liquidity = ability to enter / exit at tight spreads without
affecting the market price for the security. (...)
The market is a discounting function,
in that it discounts future expected values in the current price of
assets. This means that ultimately, when the market realizes that the Fed
cannot exit its QE position (i'm amazed this hasn't happened yet), the
discounting function requires the price of UST debt to drop, yields to rise, and
the currency to cheapen. And here is where the Fed holding a sizable
portion of all outstanding UST debt becomes both a problem, solution, and
problem again."
