Risk happens slowly then all at once.
That axiom was in evidence this week across financial asset classes, especially safe haven assets, which saw some of their largest moves on record.
That as Silicon Valley Bank, Signature Bank and Credit Suisse all needed to be rescued and the U.S. Federal Reserve doled out more money this week to financial institutions at its so-called discount window than in 2008 – $165 billion vs. $111 billion.
This long-time tracker of fund flows at the Global Markets Division of Goldman Sachs says he has been “shocked” by the magnitude off some of the moves. Here is one reason it happened.
As banking stress sparked turmoil on Wall Street last week, a familiar bogeyman is being blamed for making things worse: Thin liquidity.
Goldman Sachs Group Inc.’s Scott Rubner, who has studied flow of funds for two decades, calculates the ease of trading S&P 500 futures has plunged 88% over the past two weeks.
A similar gauge shows liquidity in Treasury futures dropped 83%.
Both measures have reached the lowest since the March 2020 pandemic crisis, according to Rubner’s analysis.
Based on the current wide spread between bid and ask prices, it takes more than $2 million of buying or selling in US stock futures before a trader risks moving the market, compared to a $17 million order book at least around the start of March.
The increasing difficulty to trade stocks and bonds without affecting their prices comes as the collapse of Silicon Valley Bank and hawkish comments from Federal Reserve Chair Jerome Powell battered Wall Street traders.
“I have been tracking flow of funds for the past 20 years, and I am shocked by the magnitude of some of these moves across asset classes,” Rubner wrote in a note to clients.
“There are some real size volumes going through and risk transfer, and it is costing a lot to move stuff around.”
Source: Goldman Sachs
Liquidity on 10-year Treasury futures, or the amount of money to move yields by 1 basis point, has dropped to $19,000 from $114,000 this month, according to Rubner.
As worries shifted from inflation to potential contagion across the financial industry, haven assets from government bonds to gold were sought, with a Barclays Plc measure tracking the group posting the largest three-day move on record.
The rush for shelter of late has created some of the wildest market moves in decades.
Over the three sessions through Monday, two-year Treasury yields sank 109 basis points, the biggest slide since 1987.
At the same time, gold prices rallied, while the Japanese yen strengthened against the dollar.
All together, their three-day swing was the largest since at least 1976, according to Barclays.
“Safe-havens all posted large sigma (standard deviation) moves, underscoring the aforementioned flight to safety,” Barclays strategists including Stefano Pascale wrote in a note.
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