Back in October, there was a “flash crash” in Treasury bonds.
The yield on the 10-year Treasury note fell by 34 basis points in just a few minutes, plunging from around 2.2% to 1.86%.
This was a violent and abrupt move, and regulators are still trying to unpack exactly what happened.
In his latest annual letter to shareholders, JPMorgan CEO Jamie Dimon talks about this event, writing that recent activity in Treasury and currency markets have been a “warning shot across the bow.”
Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations — an unprecedented move — an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so — of course, this should make you question statistics to begin with). Some currencies recently have had similar large moves. Importantly, Treasuries and major country currencies are considered the most standardised and liquid financial instruments in the world.
And while this once-in-a-3-billion-year statistical move is enough to make Dimon question the value of, well, statistics, he notes that this outsize move could have had far more serious consequences.
“The good news,” Dimon writes, “is that almost no one was significantly hurt by [the flash crash], which does show good resilience in the system. But this happened in what we would consider a fairly benign environment. If it were to happen in a stressed environment, it could have far worse consequences.”
As for what Dimon thinks could happen in a stressed environment, you can read about that here.
And if you want to read Dimon’s full letter, you can find that here.