The US Federal Reserve Board published research assessing how US Treasury market liquidity could deteriorate under adverse shocks, rather than focusing only on current trading costs. The paper finds that reduced market depth, defined as the availability of resting orders to trade, is associated with greater liquidity fragility. The analysis attributes this relationship to lower depth making low trading costs more dependent on the rapid replenishment of resting orders. The results hold across the major benchmark Treasury securities when analysed individually, supporting analogous conclusions about market-wide liquidity fragility.
Federal Reserve Board 2025-02-24
US Federal Reserve Board research finds lower Treasury market depth increases liquidity fragility
The US Federal Reserve Board released research indicating that US Treasury market liquidity could worsen under adverse shocks, emphasizing the role of reduced market depth. The study finds that lower market depth, or fewer resting orders, increases liquidity fragility, making low trading costs reliant on quick order replenishment. This conclusion is consistent across major benchmark Treasury securities.