Morgan Stanley Finds Less Treasuries Liquidity on War Volatility

Morgan Stanley’s interest-rate strategists identified forced selling in two-year Treasury notes as the driver behind March’s market slump, with yields surging amid shifting Fed expectations. Traders abandoned bets on Federal Reserve rate cuts, instead pricing in potential hikes, reversing earlier market sentiment and triggering volatility in short-term debt instruments. The liquidity crunch stems from heightened geopolitical tensions, as war-related volatility prompted rapid repositioning in Treasury markets, exacerbating selling pressure on two-year notes. Yields on two-year notes spiked sharply, reflecting the abrupt shift from dovish to hawkish Fed outlooks, with investors unwinding positions amid uncertain monetary policy trajectories. The analysis underscores how geopolitical risks can disrupt Treasury liquidity, forcing abrupt market adjustments even in typically stable segments like short-duration government debt.