Why Treasury Yields Diverged During the 2008 Liquidity Crisis
Summary
The document explains why two US Treasury bonds with the same maturity but different coupons developed a large yield spread during the 2008 crisis. The seasoned, high-coupon issue traded at a discount and consequently offered a higher yield than the more liquid issue. The explanation centers on liquidity: investors needing cash or reducing leverage sold less-liquid securities at lower prices, while benchmark Treasuries attracted demand and traded at premiums.
The account says the spread reached 80 basis points and describes the pattern as affecting many seasoned high-coupon issues, not just the pair in question. It points to a yield-curve snapshot from late 2008 as supporting context and notes similar, less pronounced episodes in other periods. The explanation is qualitative: the text supplies no dataset, detailed price analysis, or decomposition of liquidity against other possible drivers. Its core lesson is that bonds with matching maturities can still have materially different yields when their liquidity and market demand differ.
Key ideas
- Bonds with the same maturity can trade at different yields when their liquidity differs.
- During the 2008 crisis, investors' need for cash pressured less-liquid seasoned Treasuries.
- Demand for liquid benchmark issues raised their prices and lowered their yields.
- The document reports that the spread between the cited issues reached 80 basis points.
- The explanation is qualitative and does not isolate liquidity from every other potential influence.
Tags
Full text
# reason behind bond yield diverge for bonds with the same maturity during 2008 crisis # reason behind bond yield diverge for bonds with the same maturity during 2008 crisis I was told that the following two US treasury bonds diverged in yields during 2008 crisis up to 80 bps. what was the reason for it ? They are both matured in 15th Aug 2015 but has different coupon rates. - T 10.625% 8/15, with a higher yield - T 4.25% 8/15 ## Answer by Helin (score 7, accepted) https://quant.stackexchange.com/a/55556 Just to elaborate on the comments above to include some visuals. As you pointed out, the high coupon, seasoned 10.625s traded at a steep discount. The first chart below shows the yield spread against 4.25s; the spread blew up to 80 bps at one point in 2008: This phenomenon was not unique to these two bonds. Toward the end of 2008, many Treasuries traded out of whack. The chart below shows the yield curve as of December 15, 2008. As you can see, nearly all the seasoned high coupon issues traded at meaningful discounts (aka high yields), while all the most liquid issues captured enormous premia (i.e., they were priced at much lower yields). The reason is simply liquidity. This was a time of great uncertainty and flight-to-quality/flight-to-liquidity was all that mattered. Everyone was forced to sell things to either de-lever or raise cash. Anything illiquid was marked down – no one wanted to take on the illiquidity risk, so you really have to offer to sell illiquid things at very cheap prices. Even then, there was no gaurantee that anyone would bite, and this was true for US Treasuries as well. By contrast, benchmark issues, which were pretty much the only things that still traded, got so well bid & marked up because of everyone valued liquidity. Note that this is also not unique to the 2008 crisis. It happens all the time. It happened in the 1998 crisis, and it happened early this year, just not to the same extent.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.