First, the initiation of policy normalization and the ongoing reduction of the Federal Reserve’s balance sheet do not appear to have sparked a deterioration in Treasury market liquidity. Standard metrics such as bid-ask spreads have not materially changed for benchmark securities since 2014.
Market functioning has also been orderly during a number of recent events that were characterized by high trading volume and elevated price volatility, such as in early February of this year. Second, some segments of the market seem much more active than observers may have feared before the collection of TRACE data.