Today is the five-year anniversary of the bond market flash rally

Author: Adam Button | Category: News

The bond market went insane on October 15, 2015

The bond market went insane on October 15, 2015
Five years ago today no one had any clue what was happening.

One of the great market mysteries is what happened to bond markets on this day in 2014. The US 10-year yield had been in a downtrend for a month then suddenly gapped down to 1.88% from 2.14%. It later completely recovered in a record day for volume.

It all took place between 9:33 am ET and 9:45 am ET. A few hours later nearly $1 trillion in bond trades went through in the largest-even volume event.
Intraday flash rally in bonds
Moves like this in the $16 trillion US government bond market are unheard of and led to an interagency staff report on the events of that day, an annual series of Treasury market conferences, additional study of clearing and settlement practices, and the introduction of a new transactions reporting scheme, according to the NY Fed.

The report ultimately left just as many questions as answers in a series of attempts at an explanation (directly from the NY Fed report):

  • Market depth declined and trading volume surged following the retail sales data release, as bank-dealers and principal trading firms (PTFs) changed their behavior in response to the high volatility.
  • PTFs' share of trading volume-more than half in the futures and interdealer cash markets on October 15 and control days-increased significantly during the event window. Moreover, trading activity of PTFs and bank-dealers in the cash and futures markets is highly concentrated.
  • Only modest changes in net positions occurred during the event window, but there were more buyer-initiated trades as prices rose, and more seller-initiated trades as prices fell.
  • Several large transactions occurred between the retail sales release and the start of the event window, but the analysis does not suggest a direct causal relationship with the subsequent volatility.
  • The time required to process incoming futures orders increased just ahead of the event window, with significantly increased message traffic due to order cancellations.
  • "Self-trading" (where the same entity takes both sides of a trade) increased during the event window.
Perhaps the lasting legacy of the event came a day later when the Fed's Bullard hit the panic button and said the Fed should consider a delay in ending QE. That sparked a massive rally in risk assets that lasted for weeks.

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