On May 5, 2016, the Department of the Treasury kicked off a series of blog posts on the fixed income market intended to “share our perspective on the available data, discuss key structural and cyclical trends, and reiterate our policy priorities.” The posts are authored by a team of seasoned Treasury officials: James Clark, Deputy Assistant Secretary for Federal Finance; Chris Cameron, financial mathematician; and Gabriel Mann, policy advisor in the Office of Debt Management at the U.S. Treasury Department.
The initial blog post acknowledged that, like other secondary markets, the Treasury market has experienced significant structural changes over the last two decades, particularly the technological changes and the related growth of high speed electronic trading which have resulted in changes in intermediation and liquidity in those markets. According to the blog’s authors, current levels of liquidity are broadly in line with historical levels; however, the authors acknowledge that “while traditional measures may be indicative of general market conditions, they may not capture other changes in liquidity conditions.”
The Treasury Department’s second post, dated May 20, 2016, examines differences in pricing between “on-the-run” and “off-the-run” Treasury securities. The authors say that these price differences may be useful in understanding overall liquidity, and that calibration and monitoring of G-spreads embedded in market prices can help round out our understanding of secondary market conditions. Some market participants believe that liquidity conditions in the Treasury market have diverged between more-liquid on-the-run securities and less-liquid off-the-run securities. According to the authors, if true, this divergence should result in a larger difference in pricing between the two types of securities, called the “G-spread."
The post explores how the G-spread has evolved over time and across the curve, and summarizes pricing discrepancies between off-the-run and on-the-run Treasuries. According to Treasury’s analysis, while the spreads between on-the-run and off-the-run Treasury securities have widened modestly at times, they remain in line with historical levels and are a fraction of the level witnessed during the crisis. As a a result, the authors see no bellwether warnings about liquidity in fixed income markets. Notwithstanding these findings, however, the authors promise that the Treasury Department will keep a keen eye on G-spreads and will continue to evaluate options to address fluctuations in the yield curve, and manage maturity profiles with precision and flexibility.