Accessible Version
The Treasury Market Flash Event of February 25, 2021, Accessible Data
Figure 1. Intraday Price and Volume in the Treasury Cash Market on February 25, 2021
The figure plots millisecond-level transaction prices (expressed in dollars per $100 of par value) and five-minutely total trading volumes (expressed in billions of dollars) for several tenors on February 25, 2021. The top left panel shows transaction prices and volumes for the 2-year Treasury note; top right panel for the 5-year Treasury note; middle left panel for the 7-year Treasury note; middle right panel for the 10-year Treasury note; bottom left panel for the 20-year Treasury bond; bottom right panel for the 30-year Treasury bond. The prices of Treasury securities (which move inversely with yields) fell through the morning of February 25 amid elevated trading volumes before dropping sharply lower shortly after 1 p.m. The sharp spike mostly reversed within an hour. The spike down in the prices was accompanied by a sharp increase in trading volumes for most tenors before subsiding to normal levels shortly after.
Note: Transaction prices (black dots) are expressed in dollars per $100 of par value. Five-minute total trading volume bars (blue bars) are expressed in billions of dollars. Top left panel shows transaction prices and volumes for the 2-year Treasury note; top right panel for the 5-year Treasury note; middle left panel for the 7-year Treasury note; middle right panel for the 10-year Treasury note; bottom left panel for the 20-year Treasury bond; bottom right panel for the 30-year Treasury bond. Timestamps are Eastern Standard Time.
Source: BrokerTec and authors’ calculations.
Figure 2. Intraday Market Functioning on February 25, 2021
The figure plots various measures based on quotes and trading activity in the benchmark 10-year (2.A; upper subplot) and 30-year Treasury securities (2.B; lower subplot) on the BrokerTec platform on February 25, 2021. Each subplot has two panels. The top panel for each subplot plots the maximum volume of posted quotes (“market depth”) across the top 1 and 3 ask prices during each millisecond above the horizontal axis; and the depth across the top 1 and 3 bid prices below the horizontal axis. Measures of transaction flow—the sum of buyer- and seller-initiated trades in each millisecond—are also plotted above and below the horizontal axis, respectively. For the 10-year (2.A; upper subplot), there is a large reduction in depth around 1 p.m.; however, trade flow in each millisecond almost always stays well within the maximum depth available near the top of the order book. For the 30-year (2.B; lower subplot), however, there are several instances when the trade flow within each millisecond falls well outside the maximum posted depth. The bottom panel for each subplot plots the spreads between the best ask and bid quotes, again at a millisecond frequency. For the 10-year (2.A; upper subplot), quoted spreads oscillate between only two values for most of the day, which are one tick (the minimum price increment) apart. However, around 1 p.m. there is a large widening of spreads for a very short time span that quickly subsides before slightly oscillating again towards the end of the trading day. For the 30-year (2.B; lower subplot), bid-ask spreads were much wider and more volatile than the 10-year, at times oscillating over a range from one to sixty-four ticks around 1 p.m., after oscillating between just one to six ticks earlier in the day. While the volatility in spreads subsides to a degree, spreads continue to oscillate more than for the 10-year for the rest of the day.
Note: For further methodological notes see Dobrev and Meldrum (2020).
Source: BrokerTec and authors’ calculations
Figure 3. Yields on Nominal Treasury Securities
The figure plots 2-, 5-, and 10-year nominal Treasury yields from January 2020 to April 2021. Yields are for notional par Treasury securities with semiannual coupons obtained from a smooth yield curve estimated from off-the-run Treasury coupon securities. Prior to February 25, 2021, yields had been rising (and therefore prices had been falling) on the 5- and 10-year Treasury securities for several months. The pace at which these yields were increasing had been particularly rapid over the month leading up to February 25, 2021. The 2-year Treasury yield remained mostly stable in the preceding months.
Note: Yields are for notional par Treasury securities with semiannual coupons obtained from a smoothed yield curve estimated from off−the−run Treasury coupon securities.
Source: Federal Reserve Bank of New York and Board staff calculations.
Figure 4. Implied Interest Rate Volatility 6 Months Ahead
The figure plots implied volatility derived from 2-year, 6-month-ahead, 5-year, 6-month-ahead, and 10-year, 6-month-ahead swaptions. There is an increase across the board in implied volatility, with a particularly notable rise in 5-year, 6-month ahead implied volatility.
Note: Implied volatility is derived from 2-year, 6-month-ahead; 5-year, 6-month-ahead; and 10-year, 6-month-ahead swaptions.
Source: Barclays
Figure 5. Market Depth and Quoted Spread Level and Volatility in the Treasury Cash Market
The figure shows time series of daily liquidity metrics on several tenors in the cash Treasury market from January 2020 to April 2021. It is divided into two subplots 5.A and 5.B, for shorter- and longer-dated tenors, respectively. Each subplot shows daily time series of market depth, daily average bid-ask spread, and intraday volatility of the bid-ask spread. The upper sublot (5.A) shows these time series for the 2-year note (the green dotted line), the 5-year note (the red line), and the 7-year note (the blue dashed line), while the lower subplot (5.B) shows the same measures for the 10-year note (the green dotted line), the 20-year bond (the red line), and the 30-year bond (the blue dashed line). The February 25 drop in market depth, and the increases in the level and volatility of bid-ask spreads for the longest-dated securities, are clearly reminiscent of those observed at the onset of the market turmoil in March 2020. However, the severity of the impact on spreads was far less than that in March 2020, while the subsequent recoveries in both depth and spreads have been much faster for the longest-dated securities in the lower subplot.
Note: For further methodological notes see Dobrev and Meldrum (2020). The 20-year bond was first issued in May 2020.
Source: BrokerTec and authors’ calculations.
Figure 6. 10-Year On-the-Run Treasury Market Depth Following Different Episodes of Market Stress
The figure plots the timing of market depth recoveries for the 10-year note following different well-known episodes of market illiquidity segmented into three panels according to the type of recovery (quick, medium-paced, and slow, respectively). Market depth is computed as the average of the cumulative sum of the posted quote sizes at the first five bid and ask levels of the orderbook for the 10-year on-the-run Treasury note. The event date is taken to be the date of the largest initial drop in depth for each episode. The line for each event is cut off depending on the speed of the recovery of its respective event type to correspond roughly to the typical recovery time of the event type recovery time (5 business days, 1 business month, and 3 business months, respectively). The February 25, 2021 event is labelled as a medium-depth recovery event plotted in the middle panel (corresponding with its classification in Table 1) and recovers along a similar path to other events plotted in this panel, though ending at the lower range of the group.
Note: Market depth is computed as the average of the cumulative sum of the posted quote sizes at the first five bid and ask levels of the orderbook for the 10-year on-the-run Treasury note. The event date is taken to be the largest initial drop in depth surrounding well-known episodes of market stress. Quick, medium-paced, and slow depth recovery lines are cut off at one business week, one business month, and three business months, respectively, to show the different nature of these events.
Source: BrokerTec and authors’ calculations
Figure 7. Depth Recovery Times and Volatility Spikes for the On-the-Run 10-Year Treasury Note following Different Episodes of Market Stress
For each of the identified Treasury market stress events, the figure plots a marker showing the realized volatility at the onset of each against the vertical axis and the time for a 75 percent recovery of market depth against the horizontal axis. Realized volatility at the onset of each episode is taken to be the maximum realized volatility between the day before the episode and the day of the episode. The drop in market depth is calculated as the difference of depth after its initial drop on each event date and a three-day average of depth one day prior to the event date. The reported day counts are taken with respect to the first day when a three-day moving average of depth has recovered 75 percent of the initial drop in market depth. The plot shows that there is not a clear relationship between volatility and days needed for market depth to recover following episodes of market stress.
Note: Day counts reported are business days. Realized volatility at the onset of each episode is taken to be the maximum realized volatility between the day before the episode and the day of the episode. The drop in market depth is calculated as the difference of depth after its initial drop on each event date and a three-day average of depth one day prior to the event date. The reported day counts are taken with respect to the first day when a three-day moving average of depth has recovered 75 percent of the initial drop in market depth.
Source: BrokerTec and authors’ calculations.
Figure 8. Market Depth and Quoted Spread Level and Volatility in the Treasury Futures Market
The figure shows time series of daily liquidity metrics on several longer-dated tenors in the Treasury futures market from January 2020 to April 2021. It shows daily time series of market depth, daily average bid-ask spread and intraday volatility of the bid-ask spread for 10-year Treasury note futures (the green dotted line), 30-year Treasury bond futures (the red line), and the 30-year Ultra Treasury bond futures (the blue dashed line). While depth also dropped notably in the futures market, the impact on bid-ask spreads was negligible, suggesting that order book replenishment remained sufficiently fast such that there was no material increase in trading costs.
Note: For further methodological notes see Dobrev and Meldrum (2020).
Source: Refinitiv, Datascope Tick History, and authors’ calculations.