By Elisabeth Kirby, Managing Director and Head of Rates Strategy at Tradeweb
This past September, Tradeweb Markets took the first steps to address decades of decentralized pricing in the U.S. Treasury Market with one simple data point: a closing price for U.S. Treasuries. It may sound hard to believe, but, until then, the $16 trillion U.S. Treasuries market, the world’s largest and most liquid bond market, did not have a centralized mechanism for establishing end-of-day prices.
The last several months of record volatility in U.S. Treasuries further illustrated the need for a benchmark closing price that demonstrates both reliability and accuracy under these extremely challenging circumstances.
What Took So Long?
Unlike equities, where closing auctions at listing exchange determine end of day prices for individual securities, U.S. Treasuries trading is decentralized. This means the individual financial institutions that hold a particular security need to determine their own end-of-day price based on the most recent trades or actively streamed prices that sample the market for indicative contributon.
Bloomberg News described the phenomenon in real-world terms using the Treasury note issued in May 2017 with a 2% coupon and maturing in 2024:
“Three large bond mutual funds that held [the bond] valued the debt slightly differently at the end of the second quarter. The Bond Fund of America went with 101.1880. The Federated Total Return Bond Fund used 101.1820. Northern Fixed Income Fund marked it at 101.1758. The prices were calculated using market values of reported holdings.
By contrast, large equity funds managed by those three companies all agreed on where Microsoft Corp.’s stock ended the month of June: $133.96, which was the industrywide closing price.”
This issue has also resurfaced now that bond ETFs have become much more prevalent in the investment landscape. ETF issuers and index providers need a definitive closing price. Also, risk and compliance functions operate more effectively when pricing data used in surveillance systems are accurate such that differences of even fractions of a basis point in the closing price calculations from one investment manager to the next create unnecessary complexities.
Toward a Market-Driven Benchmark
The growing market need motivated Tradeweb to find a solution. But it wouldn’t be as simple as taking an end-of-day snapshot. To get a truly accurate representation of the daily closing price for every Treasury security listed for trading on their electronic Institutional platform, Tradeweb would need to collect data derived from live real-time dealer prices meant for institutional trading representing the consensus view of the market at the end of each trading day. Tradeweb captures prices in 2‐second intervals between 2:59:30 and 3:00 PM.
Establishing an Industry Standard
To ensure their U.S. Treasury Closing Prices truly represented the collective view of the marketplace based on real-world trading data, not manually submitted prices, Tradeweb partnered with ICE Benchmark Administration Limited (IBA) to provide third-party administration and oversight to the closing prices. IBA vetted the process, publishing an audited statement of compliance with International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks.
In accordance with these IOSCO principles, the Tradeweb ICE U.S. Treasury Closing Prices capture streaming data from 17 different liquidity providers and algorithmically excludes outliers, making it a trusted representation of the institutional market at the end of each day.
Consistency Under Pressure
All of the tweaks, refinements and safety protocols built into the system were put to the test this March. On March 11, for example, the day the World Health Organization officially declared COVID-19 a pandemic, the yield on the benchmark 10-year Treasury note fell as low as 0.643% in early trading and jumped as high as 0.860% following an auction of 10-year notes. The moves capped off the biggest two-session climb for the 10-year yield since January 2009.
That’s massive volatility for a market that typically moves in fractions of basis points over the course of weeks, not minutes. Throughout the chaotic trading days, however, pricing data never slowed down. During the 30-second window between 2:59:30 and 3:00 PM on those days, Tradeweb continued to derive robust pricing information for over 900 Treasury instruments without experiencing publication errors on unbiased, independently verified/audited levels.
For more information or to find out how Tradeweb ICE U.S. Treasury Closing Prices can be accessed and used by your organization, please email us at referenceprices@tradeweb.com.
