Morgan Stanley: Liquidity Stress, U.S. Treasury Market Margin Call Underway

March 26 – Morgan Stanley interest rate strategists say this month’s sell-off in U.S. Treasuries has the hallmarks of a forced unwinding of positions in two-year notes, as traders ditch bets on Federal Reserve rate cuts and start pricing in hikes—pushing the two-year yield sharply higher. Led by Eli Carter, the strategists noted in a Wednesday report that since the U.S. struck Iran on Feb. 28, trading data from CME Group-owned BrokerTec Inc. shows “U.S. Treasury market liquidity has fallen sharply, especially at the front end.” Longer-dated bonds, like the 10-year note, have stayed relatively stable, they added. “Wider bid-ask spreads typically crimp trading, so the fact volumes are still recovering reflects many trades are driven by necessity, not choice,” the strategists said. Since the conflict began, the two-year Treasury yield has climbed ~50 basis points to 3.87%, but Morgan Stanley’s analysis shows the sell-off has been “exacerbated by position unwinding and worsening liquidity conditions.” (FXStreet)