March 12 (Reuters) - Liquidity in the $17 trillion Treasuries market has deteriorated to its worse levels since the financial crisis, traders said, and some market participants are concerned that conditions could lead to investors being forced to sell assets across markets.
Fears about the spreading coronavirus and how badly it will impact the global economy have sent investors running from stocks and into lower-risk assets, including Treasuries, which hit record low yields on Monday.
Liquidity has definitely dried up, its the poorest Ive seen since the financial crisis, said Justin Lederer, an interest rate strategist and trader at Cantor Fitzgerald in New York.
Conditions in Treasuries have not been orderly. Investors this week said they struggled to get satisfactory market prices for some bonds while the spread between the cost of buying and selling bonds widened dramatically, making it more expensive to trade.
Depth in the market for 10-year U.S. Treasuries - a measure of open orders - on Monday hit its lowest level since the financial crisis, analysts at JPMorgan said in a note to clients. They said widespread work-from-home arrangements could exacerbate the issue.
Liquidity in more seasoned Treasuries, which are known as off-the-runs and make up the bulk of the outstanding debt, has been even worse than for more recently issued bonds, Lederer added.
Mark Cabana, a strategist at Bank of America, said on Thursday that the Federal Reserve or U.S. Treasury may need to buy Treasuries to stabilize the market.
The U.S. Treasury market is the bedrock for all other financial markets, Cabana said. If the U.S. Treasury market experiences large-scale illiquidity it will be difficult for other markets to price effectively and could lead to large-scale position liquidations elsewhere, he said in a report.
The New York Federal Reserve increased the size of its repo operations multiple times this week and on Thursday added $1.5 trillion in new repo operations in an effort to provide banks liquidity and stabilize markets.
It also said it will expand the maturity and composition of the Treasury purchases it makes to increase bank reserves in the system.
The adjustments "have been made to these schedules to address temporary disruptions in Treasury financing markets," the Fed said.
Stocks briefly jumped on the announcement, but it was not yet clear that it will to be enough to overcome market weakness.
"The Fed will do whatever it takes, but still needs other policies and health concerns to stabilize to durably stabilize financial conditions," Ebrahim Rahbari, a foreign exchange strategist at Citigroup, said in a report after the announcement.
Selling was evident across markets on Thursday.
Liquidity was nearly non-existent in the $3.8 trillion U.S. municipal bond market, where states, cities, schools and other issuers sell debt. A preliminary read of Municipal Market Data's benchmark, triple-A scale indicated yield increases of as much as an unprecedented 50 basis points on the long end.
"When big funds or clients have to liquidate to raise cash for all the customer redemptions, munis are usually the first thing to go," said Greg Saulnier, an MMD analyst.
High-yield U.S. corporate bonds also weakened, with major junk bond exchange-traded funds falling to the lowest level since February 2016, while an index for credit insurance protecting against exposure to junk bonds widened sharply to a nine-year high.
Stocks tumbled, with the Dow Jones Industrials index on course for its worst day since 1987.
(Additional reporting by Karen Pierog in Chicago; Editing by Megan Davies and Dan Grebler)