Block Trades Have Out-Sized Impact in Treasuries


Large block trades are moving the relatively tranquil US Treasury market more than usual and are giving desperate momentum traders something to chase.

While the Merrill Lynch MOVE index fell to a record low on August 7, a 14,000-contract trade in 10-year futures, which represented $1.1 million of risk per basis point move spiked yields momentarily.

“What you are doing right now is you hope you do not get caught in what used to be called tape bombs, now futures bombs,” Michael Franzese, New York-based head of fixed-income trading at broker-dealer MCAP LLC, told Bloomberg. “If you are moving a position for another customer and you are short or long a certain amount, and then all of a sudden one of these trades come through, it can really hurt you on a day-to-day basis.”

The diminishing turnover in US Treasuries is driving more momentum traders to trade on the disruption that block trades make rather than placing bets the direction of interest rates.

Even today, August 8, a 12,000-contract block of 10-years sent benchmark yields to the highest level of the trading session.

Such trades also are eclipsing the impact of political and economic news that usually moves the market.

“There were a couple of big buyers in the market yesterday that drove the back end of the curve,” Rick Rieder, global chief investment officer of fixed-income at BlackRock, said in an Aug. 4 interview on Bloomberg TV.

Reider credits those trades affecting the yield curves more than the news of special counsel Robert Mueller ramping up his investigation of Russian interference in the 2016 election.

As traders focus on block trades, they also have noticed that the blocks have been getting larger and well of the minimum sizes as defined by the CME Group. Some trades, such as one that hit during European market hours on August 2 for 13,820 10-year contracts was approximately five times the block trade threshold.

“Some of the sizes have been quite staggering,” Michael Lorizio, senior trader at Manulife Asset Management, told Bloomberg. “Not only has the trade moved the market initially, but it has often changed the tone for an extended period. We’ve seen follow-through trading on the back of some of those one-off, large block trades.”

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