The dysfunction in the “extremely illiquid” bond markets has investors and officials worried

By Dhara Ranasinghe, Yoruk Bahceli and Davide Barbuscia

LONDON (Reuters) – Wild government bond price swings on a scale not seen in decades amid turmoil in the banking sector have raised concerns about the proper functioning of a market believed to be vital to the global financial system.

Trading in short-dated German bond futures was briefly halted due to volatility after the European Central Bank’s interest rate decision on Thursday, and CME Group briefly halted trading in some US interest rate futures on Wednesday.

Separately, two days of chaos in China’s $21 trillion bond market ended on Friday after Beijing allowed money brokers to resume providing data to third-party platforms.

Extreme intraday price swings in government bonds, which are used as benchmarks for pricing a variety of other assets, are another headache for officials navigating the turmoil in the banking sector, which has parallels with the 2008 global financial crisis.

Jeffrey Gundlach, CEO of DoubleLine Capital, said he was considering selling government bonds earlier in the week but the market was “extremely illiquid”.

“The strangest Bond day ever was this Tuesday when if you took your eyes off the Treasury market screen for a minute… If you looked back at the screen the price could be at 10 years, 30 years ( bonds) will be different by a point.” he said.

Eurozone benchmark issuer Germany’s two-year bond futures were exceptionally volatile. On March 15, as the extent of Credit Suisse’s troubles began to emerge, the front-month futures contract experienced the largest swing between intraday highs and lows on record, according to Refinitiv data.

US and German two-year bond yields each fell more than 50 basis points (bps) on Wednesday, the largest daily moves in at least 28 years, before spiking sharply the next day.

“We’ve seen the biggest fluctuations in decades, that’s the point of comparison,” said Nordea chief analyst Jan von Gerich.

“It’s not the same volatility across markets as it was during the global financial crisis, but in bond markets it’s big swings and it tells me that all is not well.”

The story goes on

In China, meanwhile, investors grappled with a different kind of chaos.

On Wednesday, regulators banned brokers from providing data feeds, citing data security concerns. Turnover in the interbank bond market slumped 9% on Wednesday and another 16% on Thursday as traders struggled to access pricing information as many messaging groups reached out to trade.

LIQUIDITY

Liquidity, the ease of buying and selling an asset, has been a challenge this week.

Heads of government bond trading at two European banks said bid-ask spreads, which represent transaction costs for traders, remained wider than usual on Friday.

One said he expected liquidity to remain poor for a while.

Daniel Ivascyn, PIMCO’s chief investment officer, said bond market conditions this week were not as bad as they were during the 2020 COVID crisis, but noted that liquidity in the $22 trillion US Treasury market was growing “challenging” even compared to the last few years.

Meanwhile, a measure of implied volatility in the Treasury market rose this week to its highest level since 2008.

Graphic: Bond market volatility spikes – https://fingfx.thomsonreuters.com/gfx/mkt/zgpobarzwvd/bondvol.PNG

KEEP YOU AWAKE

The heightened volatility has caught the eye of officials who play a role in ensuring financial market stability.

A spokesman for the Dutch Treasury told Reuters on Friday the Treasury is closely monitoring bond markets, adding it does not expect changes to its issuance plans for the year, which are already more flexible than usual.

“Of course we will continue to closely monitor developments on the markets. If needed, we can adjust our plans,” the person said.

On Thursday, the German debt agency said its bond market was doing well but auctions could be hit by volatility, while the UK debt agency chief on Wednesday described global markets as “quite stressed and volatile”.

Analysts noted that bond volatility was exceptionally high not only due to a flight to safe-haven government bonds, but also due to a massive repricing of rate hike expectations.

“Safe-haven bonds, on which other assets are based, need stable valuations,” Nordea’s Gerich said. “When liquidity deteriorates due to wild swings in safe-haven markets, it impacts the functioning of financial markets and overall economic stability.”

(Reporting by Dhara Ranasinghe in London, Yoruk Bahceli in Amsterdam and Davide Barbuscia in New York, additional reporting by Amanda Cooper in London; Editing by Raissa Kasolowsky)