Did 10yr Yields Really Hit 4.415% Overnight?
With limited data of any particular relevance ahead of this week’s Fed announcement, the path of least resistance in the bond market would be for a broadly sideways drift between now and Wednesday. While that’s arguably proving to be the case as the domestic session matures, it didn’t look to be the case in the overnight trading hours. Evidence of the drama remains on the chart under the “high” reading for 10yr yields of 4.415. The fact that such a thing could occur and not occur at the same time is due to the over-the-counter nature of the bond market. Long story short, 4.415 wasn’t “real,” even though it technically happened. In an over-the-counter (OTC) market, prices or yields exist as both ‘bids’ (how much a buyer will pay) and ‘asks’ (how much a seller will sell for). When it comes to something like the 10yr Treasury yield, that means choosing one of the two in order to display a yield on a website or data terminal, etc. In other words, it’s not common to see the 10yr quoted as 4.325 / 4.326. The convention is to use bid prices. That’s usually no big deal, but sometimes some fairly ridiculous things can happen to the bid. It can periodically drop off the face of the earth for a variety of reasons. After all, it doesn’t much matter to the potential buyer considering they’d be getting a great deal if any seller actually dropped prices to meet the comically low bid. This is basically what happened overnight. Tokyo was closed for a market holiday, but one dealer continued entering bid prices erroneously. Technically, those were real bids entered by a real potential buyer. Of course, no one would sell at those yields (i.e. super low prices), but the bids hit the screen nonetheless. In this particular case, it looks to be a calculation entry error as the dealer in question did indeed follow the trend of the more liquid Treasury futures market during the time that yields were in the 4.4+ territory. You can clearly see when the error was caught as yields swooped instantly back to the prevailing range. You can also see when European markets came online and restored the tight correlation between futures and cash. Volume also picked up at the same time.