This one chart explains the chaos we're seeing in the bond market right now
There is chaos in the bond market.
On Thursday, US Treasury bond yields and German bund yields were spiking, extending a violent move that started on Wednesday, as both bonds hit a new year-to-date high. Bond prices fall when yields rise.
The yield on a 10-year German bund has spiked to almost 1% after trading down to 0.05% just a few weeks ago, while the 10-year Treasury yield touched 2.42%, the highest since October 2014.
And while the specter of the Fed raising rates and comments from European Central Bank president Mario Draghi that said markets will just have to get used to volatility can be seen as culprits for this latest move, this is also the manifestation of something people in markets have been talking about for the last few months: liquidity.
Liquidity can be defined a few different ways, which is sort of the problem: no one is exactly sure what it is. But the basic concern is that there isn't enough liquidity, meaning that when an investor goes to sell out of a position, they might not be able to execute their desired trade without causing a ripple in markets or taking a loss.
You'd call a market liquid if brokers and dealers - the people who are connecting buyers and sellers - were either holding or had access to a lot of the security people want to trade. In the Treasury market right now, the opposite is happening as broker dealer inventory is shrinking.
This chart from Deutsche Bank's Torsten Sløk shows how brokers and dealers currently hold a shrinking percentage of the Treasury market, and this chart tells the whole story.
Right now, investors want to move in and out of the Treasury market, and there just isn't enough paper to go around.
