US Treasury Market 2016: Bamboo Market Structure

The US Treasury market is the world’s largest and most liquid bond market.  It serves as the benchmark for a bevy of other financial markets, and by many standards represents the global risk-free interest rate.  Often, global investors rely on the market as a safe haven for investment funds when volatility, geopolitical risk, and uncertainty are on the rise.  This exalted status, however, does not preclude it from have structural inadequacies that might threaten its functional and fluid operation.

Following a moment of extreme volatility in 2014, a narrative developed which suggests the US Treasury market, like many OTC fixed income markets, may be unstable or “broken”.  As a result, the US Joint Agencies have been investigating the structural integrity and functional operation of the market to determine whether regulatory changes need to be mandated.  In the meantime, the market presses forward with organic changes that have been evolving over the past decade.

In this TABB Group report, US Treasury Market 2016: Bamboo Market Structure, TABB Group leverages 2016 interview results a wide array of dealers, large asset managers, hedge funds, and trading venues to assess the evolving landscape of the UST market.  The results suggest that whilst the market is undergoing changes in market share and liquidity formation, it continues to operate efficiently and investors are receiving high quality execution.  The report demonstrates the bifurcated nature of the market.  It details the wholesale and investor-related aspects, the manner in which they operate, and their relationship to each other.

In the end, the report suggests that while the US Treasury market bends, adapting to the changing needs of its participants, the narrative that it is on the verge of breaking is quite misleading.