MNI: Treasury Market Trading Stayed Orderly In April - Fed

Liquidity across financial markets including the Treasury market deteriorated after President Trump's April 2 reciprocal tariffs announcement but market functioning was generally orderly, according to the Federal Reserve's semiannual report on financial stability, released Friday. 

Treasury market liquidity has been poor for years and yields were particularly volatile in early April, contributing to a deterioration in market liquidity, the Fed said. Nevertheless "trading remained orderly, and markets continued to function without serious disruption," according to the report, which looked at information available as of April 11. 

Valuations also remained high relative to fundamentals across a range of markets, despite recent market declines, the report said.

Dealer intermediation in Treasury markets hit record highs in the first quarter of 2025, and "heightened client demand in early April reportedly increased balance sheet pressures for some dealers," the Fed said. 

Highly leveraged hedge funds have recently unwound some of their levered positions -- a potential contributor to recent market volatility in longer dated Treasuries, the report said -- but there is little detail on volumes due to a lack of data. (See: MNI INTERVIEW: US Bond Selloff A 'Stern Warning' To Fed -Stein)

Investors and academics surveyed by the New York Fed cited trade policy as the top risk for financial stability. US fiscal debt sustainability, which was the top-cited risk in the November report, fell lower on the list, the report said. 

"Some noted that the domestic economy could weather incremental tariffs on imported goods with only modest disruption. Respondents considered that the potential for an escalatory trade war could have more severe consequences."