U.S. liquidity premium increased

U.S. liquidity premium embedded in on-the-run (OTR) securities has increased, though not across all tenors. OTR3s, 10s, and 30s have richened sharply versus old securities over the past two weeks.

The OTR richening is in contrast with the typical price action during the previous few auction cycles. For instance, OTR10s typically cheapen versus old10s (after opening richer) following the auction, instead of richening. This OTR richness is likely attributable increase demand for liquidity amid the sharp rise in risk aversion, as evident in VIX rising to above 40, says Barclays. 

This richening in OTRs is magnified at just the 3y, 10y, and 30y tenors. OTR2y (Jul17s; the newly issued Aug17s later) and 5y (Jul20s) are relatively unchanged versus respective old securities; and the richening in OTR7s versus old has been marginal at best. In addition, new OTR2s have actually opened 0.7bp cheaper than Jul17s, even though OTR2s typically open 0.5-1.5bp richer.

Barclays says, two factors have likely contributed to this divergence between mid- and end-month OTR securities. The factors are as follows:

• First, investors seem to have expressed preference for liquidity via Treasury futures. TU and FV Treasury futures, which correspond closely to the 2y and 5y points on the Treasury curve, have richened significantly over the past two weeks versus their CTDs. Specifically, net CTD basis for TU, FV, TY, and WN futures are now trading well into the negative territory, highlighting the richness of these futures contracts. 
• Second, concession buildup ahead of August 2y, 5y, and 7y auctions has likely contributed to the lack of richening in these OTRs.