[galen211]

Thanks - we chose Treasuries because it's a highly liquid market, and the bonds are easy to value. Even large trades can't move prices by that much since the cash flows of Treasuries are fungible. Also, the current electronic systems for trading aren't necessarily good at accommodating large trades from institutional investors. The entire risk of the trade is owned by one market-maker. If trading platforms could facilitate one-to-many counterparty transactions, the market would be able to price large trades more competitively. Moreover, institutional investors could split up large trades into smaller executions without disclosing their identity to a principal market-maker. That might be more advantageous than executing a single block.

[justincormack]

Even off the run Treasuries are fairly illiquid now, and the on the runs spiked (up) late last year one day without a decent market. The situation is pretty dire, as the OP mentions there are innumerable attempts to deal with this, although I disagree on their success. Good luck with the vested interests and the old-fashionedness of the market...

[jbapple]

> Even large trades can't move prices by that much since the cash flows of Treasuries are fungible.

Could you elaborate?

[galen211]

Sure - if you own a bond maturing in 10yrs and paying a coupon of 2% yearly, what you have is a series of cash flows of 2 2 2 2 2 ... 102. In other words, a treasury bond can be decomposed into a series of zero coupon cash flows (interest payments+principal re-payment). The price of a 'whole bond' is the sum of the prices of the different zero coupon cash flows.

A bond maturing in 30yrs has at least 10yrs of cash flows that line up with the 10yr bond. Since coupon interest payments can be 'stripped' from one bond and 'reconstituted' in another bond through the federal reserve, the price of matched-maturity zero coupon cash flows, even if they are stripped from different bonds, is the same. If they weren't, there would be an arbitrage opportunity to buy the cash flows of one bond and sell the cash flows of another bond, exchange them at the Fed, and lock in an immediate profit. Sometimes arbitrage opportunities like this do exist, but typically it's due to liquidity events where it becomes impossible finance offsetting positions. There's a good article on this called "Notes on Bonds: Liquidity at all Costs in the Great Recession" by Musto, Nini, and Schwarz