The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data (2024)

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Staff Reports

The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data

Previous title: “An Index of Treasury Market Liquidity: 1991-2017”

November 2017 Number 827
Revised January 2023

JEL classification: G12

Authors: Tobias Adrian, Michael J. Fleming, and Erik Vogt

This paper uses order book and transactions data from the U.S. Treasury securities market to calculatedaily liquidity measures for a thirty-year sample period (1991–2021). We then construct a daily index ofliquidity from bid-ask spreads, quoted depth, and price impact, reflecting the fact that the varyingmeasures capture different aspects of market liquidity. The index is highly correlated with liquidityproxies proposed in the literature, but is more sensitive to short-term drivers of liquidity, suggesting that itbetter measures contemporaneous liquidity (as opposed to expected future liquidity). In March 2020, inparticular, the index peaks at a level commensurate with that seen during the 2007–09 global financialcrisis, whereas the liquidity proxies peak at much lower levels. Significant drivers of market liquidityinclude announcements, implied volatility, and the extent to which high-frequency traders are present inthe market.

Available only in PDF
Author disclosure statement

The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data (2024)

FAQs

How liquid are 30 year treasury bonds? ›

Treasury bonds are liquid, meaning they can be sold by bondholders before they mature. Treasury securities can be traded in a secondary market, also known as the fixed-income market, or more commonly, the bond market. Of course, bondholders can also elect to hang on to the Treasury bond until the maturity date.

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What is the liquidity of the Treasury market? ›

The state of US Treasury market liquidity is defined using a proxy based on the average yield errors of US Treasury bonds from a fitted Treasury curve. Additional controls include the VIX equity market volatility index, the US and global Citi Economic Surprise indices, and lags of the dependent variable.

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What is the market depth of a bond? ›

A widely cited one is market depth—the quantity of Treasury securities that market participants are willing to buy or sell at particular prices.

What is the bid ask spread in the Treasury? ›

The bid-ask spread is a commonly used indicator of liquidity. It measures the cost of executing a small trade, with the cost usually calculated as the difference between the bid or offer price and the bid-ask midpoint.

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How does a 30 year treasury bond work? ›

Treasury bonds are government securities that have a 20-year or 30-year term, and they pay a fixed interest rate on a semi-annual basis. They earn interest until maturity and the owner is also paid a par amount, or the principal, when the Treasury bond matures.

Find Out More ›

What is the current 30 year Treasury bond? ›

Basic Info. 30 Year Treasury Rate is at 4.54%, compared to 4.48% the previous market day and 3.95% last year. This is lower than the long term average of 4.74%. The 30 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 30 years.

Tell Me More ›

Do U.S. Treasury bonds have high liquidity? ›

The US Treasury building in Washington, DC. For investors watching US Treasuries for signs of renewed turmoil, JPMorgan Chase & Co. has some advice: Don't worry, liquidity in the world's biggest bond market is on the mend.

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What is the liquidity problem in the bond market? ›

Liquidity declines whenever it becomes more difficult to trade an investment due to an imbalance in the number of buyers and sellers or because of price volatility. In the case of bonds, investors should understand that the bond market isn't always instantly liquid, and some bonds are easier to trade than others.

Explore More ›

How does treasury manage liquidity? ›

It involves developing and implementing strategies to improve cash flow, such as accelerating collections, reducing expenses, managing inventory levels, and negotiating favorable payment terms with suppliers.

What happens to treasury bonds when interest rates rise? ›

When interest rates rise, prices of existing bonds tend to fall, even though the coupon rates remain constant, and yields go up. Conversely, when interest rates fall, prices of existing bonds tend to rise, their coupon remains constant – and yields go down.

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Is Investing in the bond market good or bad? ›

Although they may not necessarily provide the biggest returns, bonds are considered a reliable investment tool. That's because they are known to provide regular income. But they are also considered to be a stable and sound way to invest your money. That doesn't mean they don't come with their own risks.

Read The Full Story ›

Should you buy bonds when interest rates are high? ›

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

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What is the difference between bid and ask on Treasury bonds? ›

Buying Treasury bills on secondary markets

You'll have to deal with the bid-ask spread, which is the difference between the highest price a buyer is willing to pay (the bid) and the lowest a seller is willing to accept (the ask).

Get More Info Here ›

Should I buy at bid or ask price? ›

The Bid is the price that a buyer is willing to pay for the stock. This price is almost always lower than the Ask. The Ask is the price the seller is willing to sell the stock for. In a perfect world, we would be able to buy the stock at the Bid price, but that's rarely possible.

Why is bid-ask spread so high? ›

Bid-ask spreads can widen during times of heightened market risk or increased market volatility. If market makers are required to take extra steps to facilitate their trades during periods of volatility, spreads of the underlying securities may be wider, which will mean wider spreads on the ETF.

How liquid are treasury bills? ›

Also, most Treasury securities are liquid, which means they can easily be sold for cash. What types of securities are offered to individual investors? We sell Treasury Bills, Notes, Bonds, TIPS, FRNs, and U.S. Savings Bonds to individual investors.

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How are 30 year Treasury bonds taxed? ›

Interest income from Treasury securities is subject to federal income tax but exempt from state and local taxes. Income from Treasury bills is paid at maturity and, thus, tax-reportable in the year in which it is received.

Are Treasuries more liquid than CDs? ›

You can buy Treasury securities either through TreasuryDirect or a brokerage account. Treasury securities are more liquid than CDs though. If you want to tap your money before your bond matures you can sell it on a secondary market, which means you'll have to give it to a bank or broker to sell.

Learn More ›