The Fed’s Impact On Record Trading Volumes

 

One interesting development in the U.S. Treasury and related interest rate markets is the soaring volume of transactions as all types of market participants position themselves for a life without the Federal Reserve as a guaranteed buyer.

While the Fed has gone out of its way to create more than a little confusion about its likely plan to end its $85 billion a month (e.g., annual rate of $1.02 trillion) bond buying program, depending on how the economy fares, market participants who have looked out the window see a vastly improved housing market, soaring consumer confidence, falling unemployment, rising government tax revenues, and any number of other signals that the US economy is in the midst of a robust economic expansion.  This observation brings us back to our opening comment on market trading volumes.

The CME Group experienced huge record overall trading volume on Wednesday, May 29, 2013.  On CME Group derivative exchanges, there were 26.9 million contracts traded, of which 19.4 million were in the rates complex.  All this trading in rates derivatives occurred without the help of a data release, a policy statement, or anything special except the normal trading flow of futures traders rolling from one quarter’s contract into the next.

Putting things in perspective, the May 29 record volume day was larger than previous market-moving days such as Aug 4-10, 2011 (US Debt Downgrade), May 6, 2010 (Flash Crash), or September 16-17, 2008 (Lehman Brothers bankruptcy).   In short, for many participants in the rates markets, it no longer takes an economic release or a Fed statement to convince them that the era of quantitative easing, at least in the US, is coming to a close.

If actions speak louder than words, then the trading volumes are sending a powerful signal that the post-recession mentality of fear of the next disaster is receding into the past as market participants focus on a brighter future without assistance from the Fed.

Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact. Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He has authored five books on international finance.

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