The Liquidity Hierarchy in the U.S. Treasury Market

Abstract

We describe the complex nature of liquidity in the markets for Treasury bonds and futures contracts. Using a risk-adjusted measure of trading volume, we find that, while overall volume is greater across all cash securities than across all futures contracts, certain futures contracts are more liquid than certain cash securities, and vice versa. Furthermore, futures contracts play a special role in liquidity-challenged environments. Finally, average trade size, in risk terms, is much higher for cash securities than for futures contracts. These findings can be useful to investment practitioners, who constantly weigh the relative values of various securities against their liquidity.

Keywords: Treasury bonds, Treasury Notes, Treasury futures, liquidity, trading volume, trade size

JEL Classification: G15