Traders in the $25 trillion Treasury market experienced an unprecedented trading day, as a cyberattack on the U.S. unit of a Chinese bank impacted the outcome of a 30-year bond auction.
The poorly received $24 billion bond auction on Thursday was likely influenced by the recent ransomware attack on Industrial & Commercial Bank of China (ICBC), according to traders. This cyberattack caused disruptions throughout the market and affected liquidity. Hedge funds and asset managers were reportedly forced to redirect their trades, as mentioned by unnamed sources cited in the Financial Times.
On Friday, traders were left pondering the reasons behind the sudden lack of interest in the auction, which had repercussions for U.S. stock investors as well. The sale marked the worst performance since November 2021, with primary dealers having to step in to compensate for weak demand. A pattern of weak auctions for the 30-year bond has emerged, raising concerns for future sales in this long-dated maturity.
While some attribute the lackluster auction results to bonds appearing less attractive after a recent “explosive rally” starting in late October, Charlie McElligott, a cross-asset macro strategist at Nomura Securities in New York, suggests that there might be more to the story. In a note, he points out the ICBC cyberattack as a possible contributing factor, stating that it disrupted any clearing of U.S. Treasury (UST) trades through the bank. Consequently, many dealers likely faced difficulties trading with affected clients until the issue was resolved.
Despite the challenges posed by the cyberattack, traders remain hopeful for improved market conditions in the near future.
Uncertainty Hangs Over the Treasury Market
Adding to the uncertainty of Thursday’s trading session, Federal Reserve Chairman Jerome Powell found himself in an unexpected situation at an International Monetary Fund panel. A climate protester interrupted his speech, which was then followed by an expletive uttered by Powell himself, clearly audible on the livestream of the event.
The impact of these events was further felt when Powell made policy-related remarks, hinting at the possibility of the central bank taking action to curb inflation. “This didn’t help things and it kind of spooked people again,” commented John Farawell, head of municipal trading at New York bond underwriter Roosevelt & Cross.
However, as Friday afternoon rolled in, buyers began to regain their confidence in the Treasury market, leading to a stabilization in certain segments of government debt. This sign of calm being restored brought a rush of buying to the 30-year bond (BX:TMUBMUSD30Y), causing its yield to dip to approximately 4.7% during New York trading.
In parallel news, Bloomberg reported on the aftermath of the recent ICBC cyberattack, revealing that it had caused disruptions in the delivery of U.S. debt used as collateral. Additionally, Bloomberg described Thursday’s $24 billion 30-year bond auction as one of the worst in a decade.
It is widely speculated that the cyberattack had a significant impact on the auction. Tom di Galoma, co-head of global rates trading for BTIG in New York, said, “I don’t know the full extent, but I can’t imagine it didn’t affect it.” He further explained that such trade-settlement issues can lead to reluctance among institutional accounts, who become unsure about who is responsible for settling the trade. The cyberattack exacerbated these concerns and weakened the outcome of the auction. Ben Emons, a senior portfolio manager and head of fixed income for NewEdge Wealth in New York, agreed, stating that the ICBC cyberattack, combined with the poor auction and Powell’s interruption, temporarily disrupted liquidity in the U.S. government debt market, creating a moment of uncertainty.
In summary, the events of Thursday, from Powell’s interruption to the repercussions of the cyberattack, cast a shadow of uncertainty over the Treasury market. However, as buyers returned to certain segments of government debt, a sense of stability began to emerge once again. Although the disruptions caused by the cyberattack and the poor auction have temporarily impacted liquidity, the market shows signs of slow recovery.