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U.S. Treasuries could see more volatility as volumes dry up into year-end, with some analysts noting that investors burned from wild swings in recent weeks have become more reluctant to trade, leaving the market more vulnerable to further dislocations.

Shorter-dated Treasury yields surged in October, while 30-year bond yields plunged as spiraling inflation led investors to adapt to the possibility that the U.S. Federal Reserve may need to raise rates as soon as mid-2022 to stem price pressures.

Now, analysts say that some investors who suffered losses from this rapid repositioning may be reluctant to re-enter trades, which has reduced liquidity in the market and resulted in more choppy moves than normal.

“Some of the price action seen through October and then early November was really painful for a lot of macro accounts and that may have ... reduced some of the appetite to re-engage large positions and reengage in the market as actively as they had previously,” said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York.

The ICE BofA MOVE Index , a measure of volatility in U.S. Treasuries, has risen to its highest level since April 2020, amid broad bouts of illiquidity as COVID-19 spread in the United States and traders and investors shifted to working from home.

“You’ve seen a pretty precipitous decline in liquidity in the last couple of weeks. There’s been a lot of repositioning, a lot of stop-outs, a lot of I think investors questioning their positions as well, so it leads to very, very choppy markets,” said Gennadiy Goldberg, senior rates strategist at TD Securities in New York.

The bid-ask spreads on U.S. 2-year and 5-year notes

, a measure of liquidity that shows the difference between offered and accepted bids, have widened off and on since October, as the market priced in aggressive tightening from the Fed to curb stubbornly high inflation.

Wider spreads reflect poor market liquidity.

In addition, traders said there has been a surge in short positioning on the front-end of the curve such as the 2-year, 3-year, 5-year notes, as investors priced earlier-than-expected rate hikes. That pushed the cost of borrowing these securities in the repurchase market much lower, even negative, as demand skyrocketed, contributing to market volatility.

The cost of borrowing U.S. 2-year notes in the repo market for instance, has been negative since last month, data from Curvature Securities showed. On Thursday, that rate was at -0.30 basis points. Lenders of cash were willing to pay interest on money lent to borrow the 2-year note, instead of the borrower of cash, who usually pays interest on the overnight loan.

In a repo trade, a borrower offers U.S. Treasuries and other high-quality securities as collateral to raise cash, often overnight, to finance their trading and lending activities.

Markets often experience a seasonal slowdown heading into the holidays.

“Liquidity’s not great in December, so if the market has to reposition sharply again then it could lead to some problems. I think that’s what keeping everyone on pins and needles,” Goldberg said.

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said that some hedge funds could also take advantage of low volume days to push short-term strategies that add to volatility in a big to recoup profits.

For example, some funds may buy put options on Treasuries, which would profit from falling prices and higher yields, and also take large positions in futures that would help to send prices lower, which would benefit their options bets.

“You tend to see a little bit of gamesmanship like that, particularly after sizable losses when some funds are trying to make up into year-end,” LeBas said. “I would be unsurprised to see a little bit of that, which could create some short-term yield spikes.”

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