The Liquidity Hierarchy in the US Treasury Cash and Futures Market

Abstract

This article describes the complex nature of liquidity in the markets for US Treasury cash bonds and exchange-traded futures contracts. Using a risk-adjusted measure of trading volume, we find that, although overall volume is greater across all cash securities than across all futures contracts, certain futures contracts are more liquid than certain cash securities, and vice versa. Furthermore, futures contracts play a special role in liquidity-challenged environments. Finally, average trade size, in risk terms, is much higher for cash securities than for futures contracts. These findings can be useful to investment practitioners, who constantly weigh the relative values of various securities against their liquidity. TOPICS:Fixed Income and structured finance, futures and forward contracts, fixed-income portfolio management, exchanges/markets/clearinghouses Key Findings • This article combines the relatively new regulatory data on Treasury cash transactions from FINRA with futures transaction data at the CFTC to describe a liquidity hierarchy in the US Treasury market. • Although overall risk volume is greater across all cash securities than across all futures contracts, the liquidity hierarchy is more complex, with certain futures contracts more liquid than certain cash securities and vice versa. • Futures contracts play a special role in liquidity-challenged environments. The relative amount of risk traded through futures contracts is higher on days with large price movements and is larger at times outside of US trading hours.