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Disentangling Messages from the
Treasury Market
Roberto Perli, System Open Market Account (SOMA) Manager
2023 U.S. Treasury Market Conference
11/16/2023

Treasury market liquidity is worse than in years past, but broadly consistent
with current levels of interest rate volatility
1

10-Year Treasury Illiquidity vs Volatility:
2017 - Present
Peak March 2020 Stress

Illiquidity

July 2023 - Present

All other dates (2017 - June 2023)

16
14
12
10
8
6
4
2
0
-2
-4

11/10/23

0

50

100

150

200

Yield Volatility
Note: The illiquidity index for the 10-year Treasury note is constructed using principal component analysis using a variety of liquidity metrics calculated from BrokerTec data. The index itself is the first
component (PC1). SOFR-based implied 1M10Y volatility is used for data from 8/6/2021 onwards; LIBOR-based implied volatility is used earlier. Observations through 11/10/23.
Source: Bloomberg L.P., CME Group Inc. (BrokerTec), Staff Calculations

Models suggest term premiums accounted for the bulk of the recent change in
yields, with only a modest fraction attributable to policy expectations
2

Model Decomposition of Changes in 10-Year Nominal Treasury Yield
from July to October
ACM

Percent of Change in 10-Year Yield

BDO

KW

DKW

Memo: Desk Survey

Model average

120
100
80
60
40
20
0
-20

Term Premia

Policy Expectations

Note: ACM is Adrian, Crump, and Moench; BDO is Breach, D'Amico, and Orphanides; DKW is D'Amico, Kim, and Wei; and KW is Kim and Wright. Desk Survey series shows change from 6/5/23 to
9/11/23. Survey of Primary Dealers and Market Participants.
Source: Bloomberg L.P., Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, Staff Calculations

Most of the move in Treasury yields has been driven by real interest rates
3

10-Year Real Yield and TIPS-Implied Inflation Compensation
10-Year Inflation Compensation

Percent

10-Year Real Yield

3.0
2.5
2.0
1.5
1.0
0.5
0.0

Jan-23

Mar-23

Note: Observations through 11/14/23.
Source: Bloomberg L.P.

May-23

Jul-23

Sep-23

Nov-23

Market pricing and survey data suggest longer-run inflation expectations are
well anchored
4

TIPS-Implied Inflation Compensation
5-Year

5-Year, 5-Year Forward

Percent

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

Jan-10

Jan-12

Note: Observations through 11/14/23.
Source: Bloomberg L.P.

Jan-14

Jan-16

Jan-18

Jan-20

Jan-22