The sudden swing in the U.S. Treasury market on October 15 has investors and regulators searching for answers about what caused the sudden price swing, and wondering if it will happen again.
That day, the yield on the benchmark 10-year U.S. government bond plunged 33 basis points to 1.86 percent before rising to settle at 2.13 percent. Statistically, this kind of move would be expected to occur once every 1.6 billion years, according to
analysts cited by the Financial Times.
The strength of the Treasury market is an important consideration for the Federal Reserve as it debates whether to raise interest rates after ending its third round of quantitative easing.
So far, the main culprits for the volatility are high-speed electronic trading, changes in bank regulation and a lack of experience among a younger generation of bond traders, the newspaper said.
'Freewheeling World'
“The Treasury market is a freewheeling world where trading is not formalized like that of an exchange and where the use of circuit breakers can help steady activity,” said James Angel, associate professor at Georgetown University.
The volatility may also raise the cost of funding taxpayer debt if investors lose confidence in the Treasury’s market’s ability to handle surprises, the newspaper said.
The Federal Reserve, U.S. Treasury and Commodity Futures Trading Commission are looking at trading activity from that day to determine what triggered the sudden moves,
according to The Wall Street Journal.
Some officials see parallels between the stock market, which had a "flash crash" in May 2010 that pushed the Dow Jones Industrial Average down about 900 points in a few minutes before bouncing back, and the Treasury market, the newspaper said.
Regulatory changes have made bond dealers less willing to hold even relatively safe government bonds on their books, especially in times of wild swings. Those rules lead them to dump their holdings, potentially amplifying a sell-off.
Guggenheim Securities shut down its electronic trading system to avoid giving out erroneous prices to its clients, while still quoting prices over the phone.
The firm shutters its electronic system “at time of great volatility...as it cannot keep up with the extreme volatility of the market,” a Guggenheim spokesperson said to the newspaper.