Liquidity in the Treasury market is low. Is that a problem?

From Deutsche Bank’s Torsten Slok:

…Before the crisis, monthly volumes in Treasury trading for primary dealers was 10% to 12% of the total stock of Treasuries outstanding, see the blue line in the chart below. Today, volumes have fallen to just 4%. So it is clear that there is much less liquidity in the sense that dealers are trading a smaller share of all Treasuries outstanding. Is liquidity in markets low for structural reasons, including regulation, high frequency trading, and more Treasuries held by the Fed and other central banks? Or is liquidity low simply because investors are sitting on the sidelines and have been burnt too many times by betting on higher rates? I hear from clients a broad range of views on this and whether it is going to be a problem as we get closer to Fed liftoff. I continue to believe that this is a topic investors across asset classes need to spend time on; just because the risks are difficult to quantify doesn’t mean that we can ignore the issue.

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