The Big Idea

Uncertainty and asset complexity are affecting trade volume

Steven Abrahams | March 28, 2025

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Uncertainty has affected the debt markets lately in a range of ways, including trading volume. Volumes have hit some of the highest levels in five years in the Treasury, investment grade corporate and high yield markets, presumably as differences widen in investor opinion about the future direction of rates and credit. But surging volume is less pronounced in the credit markets, and the reason may be the rising difficulty of assessing risk there. Some money has likely headed to the sidelines, playing a part in the movement of credit spreads.

Trading volume in rates and credit has surged this year along with uncertainty around US trade policy and its effects. Measured either by absolute daily volume or by volume as a share of the outstanding market, it has surged the most in US Treasury debt, next in investment grade corporate debt and the least in high yield corporate debt. Those markets in that order arguably represent increasing complexity, at least when it comes to evaluating credit risk. Investors seem to be realigning positions in each market, but complexity is putting a brake on the process.

The US Treasury market leads the surge

Trading volume in Treasury debt this year has hit a multi-year high. For the four weeks ending March 12, average daily trading volume in notes and bonds for primary dealers hit $663 billion (Exhibit 1A). That volume tops all markets for the last five years except the 2020 onset of pandemic. That could simply reflect growth in outstanding Treasury debt, of course. But even after converting absolute volume into a percentage of outstanding Treasury notes and bonds, the surge still shows. The average day saw 4.8% of outstanding notes and bonds trade, the highest share of the market since early 2022 (Exhibit 1B).

Exhibit 1A: Trading in Treasury notes and bonds is near a 5-year high

Note: Data shows a rolling 4-week average daily trading volume.
Source: New York Fed, Santander US Capital Markets.

Exhibit 1B: The traded share of Treasury notes and bonds is at a 3-year high

Note: Data shows a rolling 4-week average daily trading volume as a share of the Bloomberg US Treasury Index (LUATTRUU).
Source: New York Fed, Bloomberg, Santander US Capital Markets.

Investment grade corporate debt follows

Compared to the Treasury market, the investment grade corporate market is more complex. Instead of a single government balance sheet, an investor needs to understand the balance sheet of dozens if not hundreds of investment grade issuers available in the primary and secondary markets. Most of these balance sheets are relatively strong with modest or low leverage and sufficient cash to cushion broad economic or sector shocks. Shifts in trade policy should trigger differences in expected impact across issuers and drive up trading. But it takes more homework to assess issuers than to asset Treasury debt, creating room for some investors to assume the worst and pushing cash to the sidelines.

The mixed effects of uncertainty and added complexity show up in investment grade corporate volumes. Average daily trading volume in that market has also surged to a multi-year high. For the four weeks ending March 12, average daily volume in debt with a maturity beyond one year hit $30 billion (Exhibit 2A). Although that tops all markets since the onset of pandemic, it only slightly tops the pace of a year ago. After converting to volume as a share of outstandings, the surge still shows up. The investment grade corporate market traded 41 bp of the outstanding debt on an average day, the highest share since pandemic but nevertheless only a few basis points above a year ago (Exhibit 2B).

Exhibit 2A: Trading in investment grade corporate debt has hit a 5-year high

Note: Data shows a rolling 4-week average daily trading volume.
Source: New York Fed, Santander US Capital Markets.

Exhibit 2B: The traded share of outstanding IG debt is up a bit year-over-year

Note: Data shows a rolling 4-week average daily trading volume as a share of the Bloomberg US Corporate Bond Index (LUACTRUU).
Source: New York Fed, Bloomberg, Santander US Capital Markets.

The high yield market surges, too, but less

The high yield market adds complexity beyond investment grade. The dozens or hundreds of available balance sheets are more leveraged with less cash and more vulnerable to shocks from trade policy. Differences in investor opinion should expand, but the workload for evaluating high yield issues is heavier than investment grade. With more complexity comes more room for assuming the worst. Trading volume should rise, but by less than Treasury or investment grade corporate debt.

For the four weeks ending March 12, average daily volume in high yield debt with maturity beyond one year hit $10 billion (Exhibit 2A). But rather than hitting a multi-year high, this year’s surge falls below trading volumes in February and September last year (Exhibit 3A). After converting to volume as a share of outstandings, the surge still shows up. The high yield corporate market traded 71 bp of the outstanding debt, below several periods in the last year (Exhibit 3B).

Exhibit 3A: High yield volume surges but falls below other points in 2024

Note: Data shows a rolling 4-week average daily trading volume.
Source: New York Fed, Santander US Capital Markets.

Exhibit 3B: High yield traded share also rises but falls short of recent peaks

Note: Data shows a rolling 4-week average daily trading volume as a share of the Bloomberg US Corporate High Yield Bond Index (LF98TRUU).
Source: New York Fed, Bloomberg, Santander US Capital Markets.

Simplicity has become a safe harbor

Between the start of tariff announcements on January 31 and March 12, option-adjusted spreads on the Bloomberg investment grade corporate index widened from 79 bp to 94 bp or 19%, and on the high yield index from 261 bp to 313 bp or 20%. Both trading volumes and spreads in credit likely are symptoms of the same thing—as market uncertainty rises, the effect is compounded in assets where evaluation becomes more expensive on the margin because of complexity, asymmetry, principal-agent differences or other imperfections in information. With a new round of tariff news due in early April and potential for more uncertainty, simplicity has become a safe harbor.

* * *

The view in rates

The market has come out of the March FOMC continuing to price in three cuts this year, one more than the Fed’s new March dots. The market and the FOMC are still in a minor standoff. The Fed clearly hesitates to draw strong conclusions about pending tariffs but anticipates that any price increases and accompanying inflation will be “transitory.”

Other key market levels:

Fed RRP balances closed at $287 billion as of Friday, up $86 billion in the last week and $161 billion in the last two. With the Treasury General Account down $424 billion in the last two week, reflecting maturity of Treasury bills and the return of cash to money market funds, repo lenders are long on cash with few opportunities in the repo market and are being forced to deploy to the RRP.
Setting on 3-month term SOFR closed Friday at 430 bp, unchanged on the week.
Further out the curve, the 2-year note traded Friday at 3.90%, down 5 bp in the last week. The 10-year note traded at 4.25%, unchanged in the last week.
The Treasury yield curve traded Friday with 2s10s at 34 bp, steeper by 4 bp in the last week. The 5s30s traded Friday at 65 bp, steeper by 6 bp over the same period
Breakeven 10-year inflation traded Friday at 237 bp, up 4 bp in the last 1week. The 10-year real rate finished the week at 188 bp, down 4 bp in the last week.

The view in spreads

Bearish on credit spreads with US trade policy in flux. The Bloomberg US investment grade corporate bond index OAS traded on Friday at 91 bp, tighter by 1 bp in the last week. Nominal par 30-year MBS spreads to the blend of 5- and 10-year Treasury yields traded Friday at 143 bp, wider by 5 bp in the last week. Par 30-year MBS TOAS closed Friday at 39 bp, wider by 3 bp in the last week.

The view in credit

We are starting to see cracks in credit quality at the weaker end of the distribution. Fundamentals for the average consumer and most corporate credits continue to look stable. Most investment grade corporate and most consumer balance sheets have fixed-rate funding so falling rates have limited immediate effect. Consumer debt service coverage is roughly at 2019 levels. However, serious delinquencies in FHA mortgages and in credit cards held by consumers with the lowest credit scores have been accelerating. Consumers in the lowest tier of income look vulnerable. The balance sheets of smaller companies show signs of rising leverage and lower operating margins. Leveraged loans also are showing signs of stress, with the combination of payment defaults and liability management exercises, or LMEs, often pursued instead of bankruptcy, back to 2020 post-Covid peaks. If the Fed only eases slowly this year, fewer leveraged companies will be able to outrun interest rates, and signs of stress should increase. LMEs are very opaque transactions, so a material increase could make important parts of the leveraged loan market hard to evaluate.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

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