Courtesy of Pam Martens.
You know times are weird on Wall Street when JPMorgan CEO Jamie Dimon devotes a good chunk of his shareholder letter, released yesterday, to fretting about whether there will be enough Treasury notes to go around in a safe haven stampede during the next crisis.
Dimon writes that “In a crisis, everyone rushes into Treasuries to protect themselves. In the last crisis, many investors sold risky assets and added more than $2 trillion to their ownership of Treasuries (by buying Treasuries or government money market funds). This will be even more true in the next crisis. But it seems to us that there is a greatly reduced supply of Treasuries to go around – in effect, there may be a shortage of all forms of good collateral.”
To underscore his point, Dimon invoked the tumult in the Treasury market on October 15, 2014, writing that on that day “Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations – an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so….”
Not to put too fine a point on it but the Homo sapiens species to which most of us belong (we can’t be positive about some traders on Wall Street) has only existed for about 100,000 years, making the “3 billion year” reference a bit over the top. Nonetheless, the move in the 10-year U.S. Treasury note on October 15, 2014 was extraordinary and has been dubbed a Flash Crash in Treasury yields by those who have taken a serious look at the day’s trading.
The day began with a lot of crowded trades betting on an improving economy and a stronger dollar. Then came the economic data releases showing a less than rosy picture. The Commerce Department reported a decline in retail sales of 0.3 percent for September; the Producer Price Index came in at a decline of 0.1 percent and the Empire State Manufacturing Survey reported that the “general business conditions index fell twenty-one points to 6.2, signaling that the pace of growth slowed significantly from last month.”
Market data firm, Nanex, reported that between 9:33 and 9:45 a.m. on the morning of October 15, 2014, “liquidity evaporated in Treasury futures and prices skyrocketed (causing yields to plummet). Five minutes later, prices returned to 9:33 [a.m.] levels.” Nanex goes on to say that “Trading activity was enormous, sending trade counts for the entire day to record highs — exceeding that of the Lehman collapse, the financial crisis and the August 2011 downgrade of U.S. debt.”
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