Some measures of liquidity in the US$17 trillion U.S. Treasury market are almost back to normal, thanks to the Federal Reserve's giant purchases, after drying up two weeks ago at the height of the coronavirus panic, but trading conditions remain challenging.
"If the Fed were to come in and cut the purchase sizes significantly, then the market would once again get pretty unstable. It's a very tenuous type of improvement," he added. "The Fed continues to absorb an awful lot of short Treasury coupons, which probably means they think it's all cheap and they need to continue to clean up that market in order to firm the base for more Treasury issuance and continue to improve trading conditions," he said.
That said, analysts said diminishing two-way or buy-and-sell flows have become a problem for U.S. Treasuries across the curve.
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