Declining Liquidity and Rising Leverage Raise Risks in US Treasury Market
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Liquidity in the US Treasury market has declined recently due to factors like monetary policy tightening and economic uncertainty. This can amplify reactions in bond markets.
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Leveraged funds have historically large net short positions in US Treasury futures, potentially exacerbating market sensitivity.
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The impact of US monetary policy shocks tends to be larger when US Treasury market liquidity is low or leveraged funds' shorts are high.
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There is some evidence US Treasury conditions can increase reactions to US policy in other countries' bond markets.
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Declining US Treasury liquidity in 2023 may help explain the relatively large yield adjustments observed.