P R OP R I ET A R Y & C ONF I D ENT I A L

TREASURY MARKET 

STRUCTURE & RECENT 

STRESSES

Presentation Before CFTC Global Markets 

Advisory Committee

MICHAEL PEDRONI, EXECUTIVE VICE PRESIDENT AND MANAGING DIRECTOR, GLOBAL MARKETS & RESEARCH

OCTOBER 25, 2021

JENNIFER W. HAN, CHIEF COUNSEL AND HEAD OF REGULATORY AFFAIRS
P R O P R I E T A R Y & C O N F I D E N T I A L

Executive Summary 

1 Treasuries are not a uniform market

2 Surprise shock from Covid prompted heavy redemptions and overseas dash for dollars

3 Treasury markets rely on multiple participants, not just traditional dealers, for liquidity

4 Repo financing relies heavily on bilateral relationships

2

5 Expanded central clearing solutions and other reforms are appropriate
P R O P R I E T A R Y & C O N F I D E N T I A L

Multiple Markets That Function Differently

3

On the Runs Cheapest to 

Deliver Issues Off the Runs Futures
P R O P R I E T A R Y & C O N F I D E N T I A L

A Tale of Multiple Markets: Treasury On-the-Runs and Off-the-Runs

Sources: FINRA TRACE Volumes - Week of September 17, 2021; Treasury Department August 2021 Detail of Outstanding Securities 4

195%

304%

560%

628%

2% 3% 3% 5%

0%

100%

200%

300%

400%

500%

600%

700%

Two Year Three Year Five Year Ten Year

On The Run Off The Run

WEEKLY VELOCITY OF TREASURY MARKET TURNOVER, BY MARKET, SEPTEMBER 2021
P R O P R I E T A R Y & C O N F I D E N T I A L

Foreign Accounts Were Responsible For Most Treasury Sales In March 2020

5

Hedge Funds

6%

Foreign Official 

Accounts

34%

Foreign Private Accounts

29%

Mutual Funds

31%

$635 Billion

SALES OF TREASURIES IN MARCH 2020, BY PARTICIPANT TYPE

Source: Financial Stability Report, Board of Governors of the Federal Reserve, November 2020
P R O P R I E T A R Y & C O N F I D E N T I A L

Deeper Off-The-Run Treasuries Suddenly Hit Secondary Markets in Early March

Source: Managed Funds Association 6

NOMINAL OFF THE RUN SPREADS VS. ON THE RUN 10-YEAR NOTE

-10

-8

-6

-4

-2

0

2

4

6

8

10

1/31/2020

2/2/20202/4/20202/6/20202/8/2020

2/10/20202/12/20202/14/20202/16/20202/18/20202/20/20202/22/20202/24/20202/26/20202/28/2020

3/1/20203/3/20203/5/20203/7/20203/9/2020

3/11/20203/13/20203/15/20203/17/20203/19/20203/21/20203/23/20203/25/20203/27/20203/29/20203/31/2020

4/2/20204/4/20204/6/20204/8/2020

4/10/20204/12/20204/14/20204/16/20204/18/20204/20/20204/22/20204/24/20204/26/20204/28/20204/30/2020

Basis Points

Fed Purchases CTDs, March 13 March 9

Number off-the-run:
P R O P R I E T A R Y & C O N F I D E N T I A L

Open Question: Why Did the Cheapest to Deliver (CTD) Issues Outperform?

Source: Managed Funds Association 7

YIELD SPREAD OF NON-DELIVERABLE ISSUES VERSUS THE CTD INTO THE 10-YEAR FUTURES CONTRACT

-8

-6

-4

-2

0

2

4

6

8

10

2/3/2020 2/10/2020 2/17/2020 2/24/2020 3/2/2020 3/9/2020 3/16/2020 3/23/2020 3/30/2020 4/6/2020 4/13/2020 4/20/2020 4/27/2020

Basis Points

6 Months Longer

9 Months Longer

6 Months Shorter

9 Months Shorter

March 9 Fed Purchases CTDs, March 13
P R O P R I E T A R Y & C O N F I D E N T I A L

Treasury Market Has Ballooned Beyond Dealer Capacity To Finance

Source: Darrell Duffie, “Still the World’s Safe Haven? Redesigning U.S. Treasury Markets After the Covid-19 Crisis” 8

0%

50%

100%

150%

200%

250%

BANK BALANCE SHEETS AS A SHARE OF MARKETABLE TREASURIES OUTSTANDING
P R O P R I E T A R Y & C O N F I D E N T I A L

Treasury Markets Rely On Multiple Participants For Liquidity

9

SHARE OF TREASURY FUTURES TRADING BY FIRM TYPE, 2014

38% 35% 41%

4%

5%

4%

53% 56% 47%

5% 4% 9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Five Year Ten Year Thirty Year

Hedge Fund PTF

SHARE OF BROKERTEC CASH TREASURY TRADING BY FIRM TYPE, 2014

17% 16%

9%

3% 2%

2%

52% 51% 59%

12% 15% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Five Year Ten Year Thirty Year

Hedge Fund PTF Nonbank Dealer Bank/Dealer

Sources: Treasury, SEC, Federal Reserve, and CFTC; “Joint Staff Report: The Treasury Market on October 15, 2014
P R O P R I E T A R Y & C O N F I D E N T I A L

The Price of Repo Finance Became Much More Tiered During March 2020

Source: Federal Reserve Bank of New York 10

SOFR REPO RATE: SPREAD BETWEEN CHEAPEST AND MOST EXPENSIVE REPOS
P R O P R I E T A R Y & C O N F I D E N T I A L

High Unencumbered Cash At Hedge Funds That Trade the Basis is Stabilizing

Source: SEC Private Fund Statistics 11

37%

39% 38%

40%

43%

40%

38%

40%

20% 19%

23% 23%

26%

24%

26% 26%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2019-Q1 2019-Q2 2019-Q3 2019-Q4 2020-Q1 2020-Q2 2020-Q3 2020-Q4

Macro Relative Value

UNENCUMBERED CASH AS A PERCENT OF NET ASSETS, BY HEDGE FUND STRATEGY
P R O P R I E T A R Y & C O N F I D E N T I A L

Treasury Repo and Cash Markets Do Not Have Enough Central Clearing Options

Source: Office of Financial Research; “Who Participates in Cleared Repo?”; Kahn and Olson; July 8, 2021 12

SHARE OF MARKET CENTRALLY CLEARED, BY SECURITY

Cleared+Facilitated By 

Custodian

3%

Cleared 

Dealer To 

Client

28%

Uncleared 

Facilitated By 

Custodian 

(Tri-Party)

30%

Uncleared 

Dealer To 

Client

39%

REPO MARKET CLEARING ARRANGEMENT

78%

62%

13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Interest Rate

Derivatives

Credit Default

Swap

Cash Treasury
P R O P R I E T A R Y & C O N F I D E N T I A L

Recommendations

13

1 Expand Central Clearing Solutions

2 Make Targeted Enhancements to Regulatory Data Collection

3 Carefully Introduce Public Dissemination of Post-Trade Transaction Data

4 Rationalize Trading Venue Oversight
P R O P R I E T A R Y & C O N F I D E N T I A L

Contact

Jennifer Han

jhan@managedfunds.org

Michael Pedroni

mpedroni@managedfunds.org 

14

Managed Funds Association

1301 Pennsylvania Ave, NW, Suite 350 | Washington, DC 20004