Photo Credit: Jon Gos

Here are some simple propositions on liquidity:

Presently, we have a lot of commentary about how the bond market is supposedly illiquid.  One particular example is the so-called flash crash in the Treasury market that took place on October 15th, 2014.  Question: does a moment of illiquidity imply that the US Treasury market is somehow illiquid?  My answer is no.  Treasuries are high quality assets that are simple.  So why did the market become illiquid for a few minutes?

One reason is that the base of holders and buyers is more concentrated.  Part of this is the Fed holding large amounts of virtually every issue of US Treasury debt from their QE strategy.  Another part is increasing concentration on the buyside.  Concentration among banks, asset managers, and insurance companies has risen over the last decade.  Exchange-traded products have further added to concentration.

Other factors include that ten-year Treasuries are long assets.  The option of holding to maturity means you will have to wait longer than most can wait, and most institutional investors don't even have an average 10-year holding period.  Also, presumably, at least for a short period of time, investors had similar strategies for trading ten-year Treasuries.