Dimon Letter

The liquidity drain in bond markets spans Treasuries to corporate notes, Dimon said in a letter to shareholders dated April 8. “Liquidity can be even more important in a stressed time because investors need to sell quickly, and without liquidity, prices can gap, fear can grow and illiquidity can quickly spread,” he wrote. “The likely explanation for the lower depth in almost all bond markets is that inventories of market-makers’ positions are dramatically lower than in the past.”

Inventories are lower, Dimon said, because of multiple new rules that affect market making, including “far higher” capital requirements. The total inventory of Treasuries readily available to market makers today is $1.7 trillion, according to JPMorgan, down from $2.7 trillion at its peak in 2007.

Erik Schiller, a money manager for Prudential’s more than $500 billion fixed-income unit, said that he’s been using futures more because they offer fast and anonymous trade execution during big market swings.

Bank Stimulus

One measure of Treasury dealers’ trading activity has fallen closer to its financial-crisis levels. Deutsche Bank AG’s index that gauges liquidity by comparing the three-month average size of dealer trades against moves in the 10-year note’s yield declined to about 25 in February. It was above 500 in 2005, and reached as low as 19 in 2009 during the depths of the financial crisis.

The Treasury Markets Practices Group -- an advisory committee on bond-market integrity backed by the Federal Reserve Bank of New York -- echoed the idea at its February meeting, saying there is increased potential for episodes of volatility and impaired liquidity in the Treasury market.

Although lower commodity prices and productivity gains are spurring economic growth in many parts of Europe, central bank stimulus globally has created fragility that over time will lead to more volatility in markets, Hunt said in the April 10 interview. “We’ve started to see more very cursory underwriting that is happening in the market and that does concern us,” he said.