It might not actually be on the calendar, but in almost every way that matters, the trading day is over for bond markets. The 11:30am 7yr Treasury auction was the last thing anyone arguably needed to wait around for. This is a bit hyperbolic, of course. It’s not as if no trades will be happening for the rest of the day–just that the trading environment will be increasingly illiquid from here on out.
As a bit of a side note, “illiquidity” means a lack of volume at a certain price. In other words, if 50 pairs of buyers and sellers were trading the same MBS at 50 different prices, the volume could be quite high, but the liquidity would be quite low. If those same 50 pairs were instead trading at 3-4 different prices, liquidity would be high. Buyers and sellers would have an easy time meeting their needs, and volatility would be lower.
The conclusion is that a lack of liquidity this afternoon can force buyers and sellers to reach farther to get their needs met, thus increasing volatility. It also means that prices can slide farther in one direction or another if there’s an imbalance between buyers and sellers because in an illiquid environment, if your counterparty isn’t meeting your price, you may not have many other options.
We embark on this illiquid afternoon adventure from trading levels that are pretty darn good. In fact, they’re the best in over a month, although we’ve pulled back just a tad from earlier morning gains. The positivity was fueled–at least in part–to weaker economic data. The 8:30am round of data had the biggest impact in that regard, with Jobless Claims and the important internal components of the Durable Goods data both coming in significantly weaker.
There haven’t been any overt market reactions to headlines since then. Gains have been holding, but the trend has been sideways to slightly weaker since 10am.