Kevin Walter’s work-from-home experiment lasted mere hours. On March 12, the Barclays trader was so alarmed by the turbulence flaring up in the US government bond market that he jumped in a car and made a dash from his home in Connecticut to his office in the normally crowded Times Square.
Trading conditions for US Treasuries had been poor for a while. But that Thursday — the day after Covid-19 was declared a pandemic — unnerving glitches escalated into mayhem. “It was a shock to see these distortions in the market,” says Mr Walter, co-head of global Treasury trading at the British bank.
It is hard to overstate the importance of the roughly $20tn market for US government debt, or the alarm that its mounting dysfunction in March caused. The Treasury market is the biggest, deepest and most essential bond market on the planet, a bedrock of the global financial system, and the benchmark off which almost every security in the world is priced.
The wild price swings in March meant many investors struggled to offload even modest Treasury positions at sensible prices. Suddenly, broker screens were going intermittently blank and showing no pricing information for what is considered the world’s risk-free rate.
Deirdre Dunn, global co-head of rates at Citi, says it was the most dysfunctional Treasury market she has seen in her career, surpassing even the global financial crisis of 2008. Layer on top of that the practical complications of many traders working from home and the emotional stress of a pandemic, and things were getting chaotic. “The intensity of everything at that time was remarkable,” she says.
Urgent calls took place between banks and the Federal Reserve as well as the US Treasury department. Rumours of hedge funds collapsing due to imploding Treasury bets went through industry WhatsApp groups like wildfire. Some even fretted that the Treasury might face the previously unimaginable scenario of a failed auction of US government debt.
“There was a point in time when we were wondering if the bond market would really ever function again,” says Nick Maroutsos, co-head of global bonds at Janus Henderson, an investment group. “If it continued for a couple of weeks, we were thinking we were looking at doomsday.”
To avert calamity, the Fed delivered an unprecedented series of measures, surpassing even its response to contain the crisis over a decade ago. Trading conditions soon began to stabilise, volatility ebbed and before long, the central bank had stoked a historic rebound in financial markets.
Nonetheless, the events of March have cast a long shadow. Such turmoil simply shouldn’t…