Buying and selling exercise in benchmark U.S. Treasury securities now concentrates on the final buying and selling day of the month. Furthermore, this stepped-up exercise is related to decrease transaction prices, as proven by a smaller worth impression of trades. We conjecture that elevated turn-of-month portfolio rebalancing by passive funding funds that handle relative to fixed-income indices helps clarify these patterns.
Buying and selling Quantity Concentrates on the Final Day of the Month
Since 2020, buying and selling exercise in benchmark Treasury notes and bonds has been roughly 33 p.c increased on the final buying and selling day of the month, on common, as proven within the chart under.
Buying and selling Quantity Is Increased on the Final Day of the Month
Notes: The chart exhibits the common p.c deviation of buying and selling quantity on every day of the month as in comparison with the common for a similar day of the week for the 2 weeks previous and following that day. Days of the month are plotted relative to the final day of the month, with 0 being the final buying and selling day and 1 being the primary buying and selling day. Quantity is for probably the most not too long ago auctioned two-, three-, five-, seven-, ten-, twenty-, and thirty-year nominal securities and the pattern interval is January 1, 2020, to July 31, 2024.
Furthermore, as proven within the subsequent chart, this end-of-month impact has been rising over time and was primarily nonexistent within the every day knowledge earlier than 2015.
Finish-of-Month Results Have Been Rising over Time
Notes: The chart exhibits the common p.c deviation of buying and selling quantity on every day of the month as in comparison with the common for a similar day of the week for the 2 weeks previous and following that day for the indicated time durations and benchmark Treasury notes. The pattern interval is January 1, 2005, to July 31, 2024.
To gauge the end-of-month patterns way back to doable, we base our evaluation on knowledge from an interdealer dealer whose protection goes again to the early 2000s. Treasury TRACE, in distinction, higher measures the breadth of buying and selling available in the market, together with for the dealer-to-customer market and seasoned securities (see this publish), however begins in July 2017. Whereas there isn’t any motive to suppose that our evaluation is biased regardless of not viewing all market exercise, month-end patterns might differ in different segments of the market.
Our evaluation controls for day-of-week results. This might matter as a result of Friday is the final buying and selling day of the month about thrice extra typically than different weekdays (Friday is the final buying and selling day for months that finish on Saturday or Sunday). That stated, exercise on Friday is akin to that of different weekdays, with benchmark notice and bond quantity about 4 p.c decrease than common. By comparability, quantity on Monday is 12 p.c decrease than common, whereas quantity on Tuesday, Wednesday, and Thursday is increased than common by 2 p.c, 5 p.c, and seven p.c, respectively.
Our evaluation doesn’t management for variations in end-of-month results throughout months. Most notably, buying and selling tends to be 16 p.c decrease on the final buying and selling day of December due to the shortened vacation buying and selling hours, decrease buying and selling desk staffing ranges, and probably positions which have been realigned upfront of that day. It follows that quantity has been 37 p.c increased on the final day of the month since 2020 if Decembers are excluded. We don’t discover vital variations in end-of-month patterns for different months.
The top-of-month impact is powerful to safety sort, as proven within the chart above. Two- and five-year notes are issued month-to-month, on the final day of the month, which could induce some month-to-month sample in buying and selling exercise. Nonetheless, the impact is roughly as sturdy for the ten-year notice, which is issued mid-month. (Furthermore, even for the two- and five-year notes, the extra related public sale days are concentrated two to 3 days earlier than the tip of every month, as proven in this paper’s Determine A1). Patterns are considerably stronger for the much less actively traded benchmark securities, which explains why the month-end impact within the first chart above is considerably greater than the results noticed within the second chart for the two-, five-, and ten-year notes (for a similar 2020-2024 pattern interval).
Why Do These Finish-of-Month Results Happen?
Finish-of-month results have been studied throughout numerous asset markets and geographies, focusing totally on costs and returns. For instance, Ariel (1987) and Lakonishok and Smidt (1988) discover increased U.S. fairness market returns in the previous couple of days of the month. Hartley and Schwarz (2019) and Etula et al. (2020) establish increased end-of-month U.S. Treasury returns and attribute them to cost stress from institutional buyers’ trades and portfolio rebalancing. The previous paper exhibits that web month-end purchases of Treasuries by insurers exceed web purchases on some other day of the month. Furthermore, it finds that insurers that benchmark their efficiency extra intently to indices present larger web purchases of the securities which can be added to the index and that these purchases are targeting the end-of-month rebalancing date.
Proof on end-of-month worth patterns and returns, nevertheless, doesn’t instantly translate to increased than regular quantity on the final buying and selling day of the month. Whereas not learning the impression on the combination market, Dick-Nielsen and Rossi (2019) look at the results of company bond index rebalancing, additionally occurring on the final day of the month, and discover that the quantity of bonds which can be excluded from the index is 4 to 5 occasions increased than regular.
Comparable channels is likely to be at play within the U.S. Treasury market. The excessive focus of quantity on the final buying and selling day of the month and the growing focus over time coincide with the expansion of passive funds that observe index modifications. For instance, though nonetheless small as a fraction of U.S. Treasuries excellent, exchange-traded funds (ETFs) that observe Treasuries grew greater than ten-fold between 2013 and mid-2024 as proven within the chart under, surpassing the two-fold progress of Treasuries excellent over the identical interval. Asset managers are more and more managing relative to indices which can be rebalanced on the finish of every month and this can be inflicting buyers to more and more commerce at the moment.
U.S. Treasury ETF Belongings Underneath Administration Are Rising Quickly
Notes: The chart plots the month-to-month common of belongings beneath administration of U.S. Treasury exchange-traded funds (ETFs). U.S. Treasury ETFs embrace the sixty-six ETFs included within the “Treasuries ETFs checklist” on etfdb.com and are described as ETFs that make investments primarily in U.S. Treasury notes of varied lengths. The pattern interval is January 1, 2013, to July 31, 2024.
How Is Finish-of-Month Liquidity Affected?
The connection between buying and selling quantity and liquidity will not be a easy one. Quantity and volatility are positively correlated, and volatility and liquidity are negatively correlated (see this examine, for instance). One subsequently may anticipate a damaging relationship between quantity and liquidity, and that’s what’s seen at occasions of market turmoil, comparable to across the near-failure of Lengthy-Time period Capital Administration (see this paper), throughout the 2007-09 monetary disaster (see this paper), and throughout the COVID-19-related disruptions of March 2020 (see this paper).
Within the case of month-ends, nevertheless, the purported causes for the upper end-of-month exercise are usually not information-based, and the upper quantity will not be related to increased volatility. Increased quantity that arises impartial of volatility is related to improved liquidity, per bigger Treasury points, and probably the most not too long ago issued Treasuries, being extra actively traded and extra liquid (see this paper and this paper).
It follows that liquidity tends to be markedly higher on the final buying and selling day of the month. Since 2020, price-impact coefficients for benchmark notes have been about 26 p.c decrease, on common, as proven within the chart under, indicating higher liquidity.
Worth Impression Is Decrease on the Final Day of the Month
Notes: The chart exhibits the common p.c deviation of worth impression on every day of the month as in comparison with the common for a similar day of the week for the 2 weeks previous and following that day averaged throughout the benchmark two-, five-, and ten-year Treasury notes. Days of the month are plotted relative to the final day of the month, with 0 being the final buying and selling day and 1 being the primary buying and selling day. Worth impression is calculated for every day and safety because the slope coefficient from a regression of one-minute worth modifications on one-minute web order movement (buyer-initiated buying and selling quantity much less seller-initiated buying and selling quantity). The pattern interval is January 1, 2020, to July 31, 2024.
Furthermore, this end-of-month liquidity enchancment has been growing in magnitude over time, in a fashion akin to that for buying and selling quantity, as proven within the subsequent chart.
Finish-of-Month Worth Impression Results Have Been Rising in Magnitude over Time
Notes: The chart exhibits the common p.c deviation of worth impression on the final buying and selling day of every day of the month as in comparison with the common for a similar day of the week for the 2 weeks previous and following that day for numerous time durations and benchmark Treasury notes. Worth impression is calculated for every day and safety because the slope coefficient from a regression of one-minute worth modifications on one-minute web order movement (buyer-initiated buying and selling quantity much less seller-initiated buying and selling quantity). The pattern interval is January 1, 2005, to July 31, 2024.
Comparable however weaker patterns are noticed for different measures of market liquidity. Quoted depth on the inside tier has been about 6 p.c increased on the final buying and selling day of the month since 2020, on common, implying higher liquidity, as in comparison with 9 p.c decrease between 2005 and 2009 (p.c variations are first calculated for every of the two-, five-, and ten-year notes, after which averaged throughout them). Bid-ask spreads have been about 1 p.c narrower on the final day of the month, on common, suggesting barely higher liquidity, as in comparison with 2 p.c wider between 2005 and 2009. The weak end-of-month results for spreads particularly are possible attributable to minimal tick sizes, which trigger spreads to fluctuate little outdoors occasions of market stress (see this paper, for instance).
Implications
Based mostly on this publish’s findings solely, one may conclude that the final buying and selling day of the month is an particularly good time to commerce due to the day’s increased buying and selling quantity and decrease transaction prices. Nonetheless, the proof of periodicity in returns from different research means that advantageous occasions to commerce fluctuate for different causes and differ between patrons and sellers. These month-to-month patterns additionally change over time, as proven on this publish, warranting shut watching of those patterns going ahead.
Henry Dyer is a analysis analyst within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
Michael J. Fleming is the top of Capital Markets Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
Or Shachar is a monetary analysis advisor in Capital Markets Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
The right way to cite this publish:
Henry Dyer, Michael Fleming, and Or Shachar, “Finish‑of‑Month Liquidity within the Treasury Market,” Federal Reserve Financial institution of New York Liberty Road Economics, September 24, 2024, https://libertystreeteconomics.newyorkfed.org/2024/09/end-of-month-liquidity-in-the-treasury-market/.
Disclaimer
The views expressed on this publish are these of the creator(s) and don’t essentially mirror the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the accountability of the creator(s).
