Global uncertainties ranging from the euro zone's ongoing debt crisis to the U.S.'s deficit-reduction plans are pushing longer-term investors to the sidelines earlier than normal this holiday season. This withdrawal by so-called real-money investors could be helping "robots" dominate trading in Treasurys, according to Nomura.
The bank says investors are taking to the stands because they can't get a firm grip on how events on both sides of the Atlantic, which are increasingly driven by politics, are likely to play out. As a result, investors are afraid to make medium- or long-term commitments.
The lack of liquidity that has resulted means the market is more susceptible to sharp swings; few value-oriented investors are around to level things out. Algorithmic trading systems buy or sell based on sets of rules linked to price levels and the timing of market movements, while traditional investors make judgements based on a combination of data and their perception of the economy.
Without humans around, machines are "left to eat each other up," says Anthony Lazzara, a trader and managing partner at M&N Trading. "People are saying the market is moving because there's no one else in there but the machines, and I agree."
This could mean an especially bumpy ride through year-end, especially with the European Union summit on Friday. Once again, investors are hoping leaders come up with plans to deal head-on with the sovereign-debt crisis.
Analysts say the trend toward program-driven trading isn't as much a boon to algorithmic traders--who likely won't capitalize on the lack of real-money action--as it is a headache to the few remaining value-oriented investors. Computer trading tends to chase rallies and sell-offs, making an already volatile market even more treacherous.
It isn't clear exactly how much of the market is comprised of algorithmic trading, but several signs point to prices being increasingly driven by technical factors--an indication that program trading is playing a bigger role.
Volume in the cash Treasurys market, where real-money investors usually trade, has dried up since August. The 10-day moving average of market volume has dropped to $113 billion, the lowest level since the first week of the year, according to CRT Capital government-bond strategist David Ader. It was $181 billion a month ago and the year-to-date average is $170 billion.
Activity in Treasury futures--a focus for activity by algorithmic traders--increased in November from October, according to the Chicago Mercantile Exchange. The volume on 10-year bond interest-rate futures, for example, rose 13.0%.
And anecdotally, trading is no longer closely tracking the economic fundamentals that usually guide real-money participants' decisions. That is one reason the usual inverse relationship between bond and stock prices is breaking down. The pattern faltered Nov. 25, the Friday after the Thanksgiving Day holiday, when both markets fell at the same time, and again on Nov. 28 as Treasurys climbed alongside equities.
"Trading is happening through momentum rather than estimates of fundamental value," said George Goncalves, Nomura's head of rates strategy.
Terry Belton, global head of fixed-income strategy at J.P. Morgan Chase & Co., says the broad lack of liquidity is more than just a seasonal effect. He expects technical factors to play a more dominant role in the Treasurys market in the coming year, part of a deeper change as U.S. and euro-zone banks go through a slow, painful process of reducing their reliance on borrowed money. Banks have held on tightly to cash since the 2008 global recession to brace for higher capital requirements and stricter limits on the use of leverage, crimping their ability to act as middlemen and facilitate trading.
J.P Morgan's "market depth" index, which measures the amount of debt that could be traded by matching the top three bids and offers each day for 10-year notes, shows an increasingly shallow marketplace. The total is currently about $90 million, compared to about $500 million before the 2008 financial crisis.
The bank says investors are taking to the stands because they can't get a firm grip on how events on both sides of the Atlantic, which are increasingly driven by politics, are likely to play out. As a result, investors are afraid to make medium- or long-term commitments.
The lack of liquidity that has resulted means the market is more susceptible to sharp swings; few value-oriented investors are around to level things out. Algorithmic trading systems buy or sell based on sets of rules linked to price levels and the timing of market movements, while traditional investors make judgements based on a combination of data and their perception of the economy.
Without humans around, machines are "left to eat each other up," says Anthony Lazzara, a trader and managing partner at M&N Trading. "People are saying the market is moving because there's no one else in there but the machines, and I agree."
This could mean an especially bumpy ride through year-end, especially with the European Union summit on Friday. Once again, investors are hoping leaders come up with plans to deal head-on with the sovereign-debt crisis.
Analysts say the trend toward program-driven trading isn't as much a boon to algorithmic traders--who likely won't capitalize on the lack of real-money action--as it is a headache to the few remaining value-oriented investors. Computer trading tends to chase rallies and sell-offs, making an already volatile market even more treacherous.
It isn't clear exactly how much of the market is comprised of algorithmic trading, but several signs point to prices being increasingly driven by technical factors--an indication that program trading is playing a bigger role.
Volume in the cash Treasurys market, where real-money investors usually trade, has dried up since August. The 10-day moving average of market volume has dropped to $113 billion, the lowest level since the first week of the year, according to CRT Capital government-bond strategist David Ader. It was $181 billion a month ago and the year-to-date average is $170 billion.
Activity in Treasury futures--a focus for activity by algorithmic traders--increased in November from October, according to the Chicago Mercantile Exchange. The volume on 10-year bond interest-rate futures, for example, rose 13.0%.
And anecdotally, trading is no longer closely tracking the economic fundamentals that usually guide real-money participants' decisions. That is one reason the usual inverse relationship between bond and stock prices is breaking down. The pattern faltered Nov. 25, the Friday after the Thanksgiving Day holiday, when both markets fell at the same time, and again on Nov. 28 as Treasurys climbed alongside equities.
"Trading is happening through momentum rather than estimates of fundamental value," said George Goncalves, Nomura's head of rates strategy.
Terry Belton, global head of fixed-income strategy at J.P. Morgan Chase & Co., says the broad lack of liquidity is more than just a seasonal effect. He expects technical factors to play a more dominant role in the Treasurys market in the coming year, part of a deeper change as U.S. and euro-zone banks go through a slow, painful process of reducing their reliance on borrowed money. Banks have held on tightly to cash since the 2008 global recession to brace for higher capital requirements and stricter limits on the use of leverage, crimping their ability to act as middlemen and facilitate trading.
J.P Morgan's "market depth" index, which measures the amount of debt that could be traded by matching the top three bids and offers each day for 10-year notes, shows an increasingly shallow marketplace. The total is currently about $90 million, compared to about $500 million before the 2008 financial crisis.
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