Leverage and Margin Spirals in Fixed Income Markets during the COVID-19 Crisis

Abstract

For a two-week period in mid-March 2020, government bond markets experienced uncharacteristic turbulence, sometimes selling off sharply in risk-off episodes when they would normally attract safe haven flows.Evidence in the US Treasury market points to forced selling of treasury securities by investors who had attempted to exploit small yield differences through the use of leverage.Even though government bonds are safe assets, large holdings by leveraged investors may detract from orderly market functioning and may necessitate interventions by the central bank.