Fewer buyers, U.S. Treasury liquidity "significantly deteriorated" this week

The liquidity of the U.S. Treasury market is experiencing a "catastrophic" shrinkage, with the $30 trillion market facing enormous uncertainty.

Trump's erratic tariff policies have triggered a significant withdrawal of investors from U.S. assets. This week, the U.S. Treasury market faced an epic sell-off, with the yield on the 10-year Treasury rising nearly 50 basis points, marking the largest increase since 2001; the yield on the 30-year Treasury rose 44 basis points this week, indicating a sharp decline in demand for long-term bonds.

This has led to the most severe single-week loss in the Treasury market since the turmoil in the U.S. financial system in 2019 forced the Federal Reserve to take action.

The liquidity in the U.S. Treasury market is deteriorating sharply. JPMorgan analysts stated that market depth (an indicator measuring the market's ability to absorb large trades without significant price changes) has significantly worsened this week, meaning even small trades can have a substantial impact on yields.

A trading head from a major U.S. bond management firm revealed to the media that the current market depth is 80% lower than the normal average level, "which is unimaginable under normal circumstances."

Liquidity Risk Intensifies

Another signal of the long-term liquidity decline in the U.S. Treasury yield curve is that the bid-ask spread for the benchmark 30-year Treasury almost reached a full basis point this week, a level not seen since the beginning of 2023.

At the same time, the volatility indicator in the U.S. Treasury market has also reached its highest level since October 2023. Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, warned:

"Even a slight breeze passing through the Treasury market today could move rates by a quarter of a percentage point."

Small Trades May Trigger Large Volatility

Despite the Federal Reserve's clear statement on Friday that it is "absolutely" prepared to help stabilize the market if necessary, this action would have a chain reaction on the bond market and the entire financial market, but its direct control is over short-term rates, with bonds further out in maturity being less affected.

Matt Eagan, a portfolio manager at Loomis, Sayles & Company, analyzed:

"Once they enter the long-term bond market, they are really out of consideration."

"The natural buyers in this market are becoming fewer, and any slight change in supply and demand could lead to significant volatility."

Considering that foreign investors are one of the largest holders of U.S. government debt, some analysts and investors are concerned that the accelerating pace of foreign investor sell-offs could push up U.S. Treasury yields, thereby raising U.S. interest rates. Eagan warned:

"In the context of a massive fiscal deficit with no reliable plan to control it, disputes with major trading partners who are also your debt financiers become particularly dangerous."

Collapse of Confidence: The Loss of Trust in U.S. Assets

Meanwhile, the dollar is also facing a significant decline. On Friday, the dollar fell 0.9% against a basket of its major trading partners' currencies. All currencies in the G10 group rose against the dollar, indicating that investors are further withdrawing from U.S. assets.

Given the dollar's core role as a safe haven in the global financial system, the simultaneous decline of U.S. Treasuries and U.S. stocks, along with the weakening of the dollar, further highlights the abnormality of the current situation.

A European banking executive stated in an interview:

"We are concerned because the trends you see do not point to a normal sell-off. These indicate a complete loss of confidence in the world's strongest bond market."

Peter Tchir, head of U.S. macro strategy at Academy Securities, stated:

"Foreign holders globally are selling U.S. Treasuries and corporate bonds, which is real pressure."

"There is genuine concern worldwide about not knowing where Trump will go next."