Regulators find no single reason for bond market volatility
The United States Treasury Department and other government agencies said Monday they are unable to pinpoint a single reason for a period of extreme volatility that hit the Treasury securities market on October 15 last year.
Treasury, the Federal Reserve and the other agencies issued a joint report saying that a variety of factors, including record trading volumes, may have contributed to the volatility, which was dubbed the 'flash crash'. Yields on 10-year Treasury bonds gyrated wildly for a brief period during the day.
Republicans have charged that the incident could be linked to the massive overhaul of financial markets that Congress approved in 2010 to try to prevent a repeat of the 2008 financial crisis. But officials said they found no evidence that regulatory changes from the Dodd-Frank Act played a role.
The report did recommend that rules governing the Treasury bond market be reviewed. It also suggested upgrades to procedures used by regulators to monitor daily trading activities in a rapidly evolving market.
The report stressed that while the way investors trade on the Treasury bond market has changed with the growing use of computers to execute high-speed trading strategies, the market remains the deepest and most liquid government securities market in the world.
On October 15, the yield on the 10-year Treasury bond traded in a range of 37 basis points, with the sharpest moves occurring between 9:33 a.m. and 9:45 a.m. Eastern Time. Since 1998, there have been only three times when the intraday move of the 10-year bond has been larger. All those incidents were linked to major news, such as the announced start of large bond purchases by the Federal Reserve.
The report lists various developments that "may have contributed to the heightened volatility" that day, but the regulators were unable to isolate a single factor.
The report called for further study of how the Treasury market has evolved in recent years. It also said the current regulatory requirements governing the market should be reviewed to determine whether any changes were warranted.
In addition to Treasury and the Fed, the agencies contributing to the study were the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve Bank of New York, which carries out bond trading operations for the central bank.