The US Treasury Dept. released its awaited report on October 15 today. I started to read through its 72 pages but it became clear rather quickly this wasn’t anything but, frankly, junk. The ultimate message is simply one of “computers.” In other words, there is no discussion, apart from simple bland references here and there, about what really transpired on October 15, just some mechanical issues that might have played a role in the specific events of that morning. There is really no attempt to discuss why UST’s were bid so heavily in the first place, only what that sustained bid did once it hit the “market.”
Bloomberg’s summary was perhaps the best on that account:
Despite the the 72-page report into the matter, much of the day’s events remain a mystery and U.S. regulators did not pinpoint a single cause. Meanwhile, the degree to which liquidity, or ease of trading, in the vast U.S. Treasury market has deteriorated remains the ultimate enigma.
The problem is that it is not an “enigma”, only that government officials and policymakers refuse to acknowledge that systemic liquidity has been so severely impaired. That would undermine, if not fully discredit, all the running narratives about how the financial world is “fixed” so we can proceed smoothly toward re-embracing pre-crisis mentalities. To give that fact official imprimatur is apparently too much honesty for even the Treasury Dept. to countenance, thus…computer trading.
The closest the entire report gets to actual relevance is the opening discussion of Section 1, supposed to be about more generally “liquidity”:
The U.S. Treasury market is the deepest and most liquid government securities market in the world. This superior liquidity is important for a number of reasons: it accrues lower cost of borrowing to Treasury thus benefitting taxpayers, it allows U.S. Treasury securities to act as a reliable interest rate benchmark for a wide range of private market transactions, it provides a reliable means for market participants to transfer interest rate risk on a substantial scale, and it is supportive of the implementation of U.S. monetary policy.
Monetary policy is the important part here, for more than one dimension. Though it is claimed that this vital, policy-linked market is the most “liquid” the report follows only three paragraphs later with:
The U.S. Treasury market enjoys liquidity defined more broadly, with continuous trading and substantial market depth. However, on October 15, specifically in the 12 minute event window, the U.S. Treasury market—while in one sense remaining liquid as participants were able to continuously transact—experienced uncharacteristically shallow market depth. Moreover, the continuous trading in these 12 minutes seemed unrelated to any new information, leading to questions about the efficiency of price formation in the Treasury market during that time. A higher incidence of such strains in market liquidity could prove harmful to the many critical functions this market enables and serves.
That certainly might call into question every assumption conjured with the “most liquid” market qualification. To figure out whether that is true, Treasury instead focuses almost exclusively on those 12 minutes. As you would expect, the word “bubble” is nowhere in the entire report. That would not be a pertinent criticism if the stated intent was to focus on the specific events of that day, but instead this report is being driven as a comprehensive “explanation” for much larger issues that it clearly does not want to touch.
This is not unexpected, as the reluctance to publicly admit serious structural problems and flaws was apparent even as early as October 15. It should be pointed out, too, that the Treasury Dept. was not the sole agency involved, as the SEC and CFTC were part of the “joint” exercise as well as the Board of Governors of the Federal Reserve System and FRBNY. In short, the report played down to every degrading expectation.
I wrote all the way back on December 16 that this was a systemic and “dollar” event:
The TIC data for October catches what looks like the beginning of the post-October 15 ripple into the exterior of the eurodollar system. The major focus for November will be on any central bank activity in the “official” segments to gauge how far and how deep this wave of disorder penetrated. Again, judging by currency prices almost everywhere, this has the makings of something larger than 2013’s version. “Tight dollars” are not an expression of optimism; to this degree is quite meaningful.
Given the crashes in multiple currencies and the ongoing central bank activities in “dollars” you would think there would be some serious public interest on the part of officials. Unfortunately, there are actually two interpretations of that unwillingness; either the government is hiding the real extent or, quite likely, they simply don’t know it (since it isn’t accepted orthodoxy). Neither is a positive signal, but in the case of the latter it would be perfectly consistent with everything since 1995 without even resorting to “conspiracy theory.” Never attribute to malice what is easily stupidity, ignorance, or, likely in this case, stupidly ignorant ideology.
Janet Yellen can still have her “resilient” markets without them ever being so, and getting worse along the way. It will probably be too late before the government actually figures out that is the problem.