The Treasury Market Flash Event of February 25, 2021

The Treasury market flash event of February 25, 2021 underscores the pivotal role of high-speed liquidity provision in the most liquid electronic parts of the Treasury market. We find evidence that the sharp drop in prices that day was accompanied by a sudden drop in market depth and a brief deterioration in high-speed liquidity provision amid elevated transaction volumes, albeit to a much lesser extent than during the episode of severe illiquidity in March 2020. Similar to some previous episodes accompanied by moderately elevated economic and financial market uncertainty, market depth has recovered steadily since February 25 at a pace comparable to that observed following other such episodes, while high-speed liquidity provision appears to have rebounded fairly quickly. That said, market depth has taken over a month to partially recover, which suggests that Treasury market liquidity has been more heavily reliant on high-speed replenishment to meet trading demand and may remain fragile