Measuring What Matters: A New Lens on Liquidity in U.S. Rates

Data Analysis by: Mihir Chinai, Steve Qiu, Gabriel Zanuttini-Frank, Rene Ulloa, U.S. Institutional Rates Data Science

Liquidity is the foundation of well-functioning markets, and one of those market truths everyone talks about but few can measure directly. In U.S. institutional rates markets - where trillions of dollars change hands daily - liquidity influences not just execution costs but how efficiently markets absorb information and adjust pricing.

Traditionally, investors have relied on bid-ask spreads, implied volatility or dealer commentary to gauge liquidity. While useful, these measures often reflect expectations or snapshots rather than what participants experienced when trading.

That gap between perception and reality can widen quickly during periods of stress. For example, during the week following "Liberation Day" in April 2025, the S&P 500 fell by more than 10.5% and the VIX moved above 65 - a level previously reached only during the global financial crisis of '08 and the 2020 pandemic. But actual transaction cost (T-Cost) data told a more measured story - liquidity conditions were far less strained than what the market experienced during the COVID crisis of March 2020.

Without a standardized way to compare those episodes side by side, however, that distinction wasn't immediately obvious. We believed the market needed something clearer - and grounded in what is actually happening on any given day.

Moving from Implied Signals to Realized Conditions

To bring greater clarity around liquidity during volatile market conditions, we introduced the Tradeweb Liquidity Cost Index - a new framework built on aggregated transaction data from our institutional rates trading platform. Rather than relying on models or forward-looking indicators, the index captures realized execution costs, actual intraday price movement and the cohesion of dealer pricing across U.S. interest rate products.

At its core is T-Cost, which is expressed in the same units traders use every day - basis points (bps). By measuring the realized cost of trading benchmark size during principal market hours, the index answers a simple but essential question: What did it really cost to trade today compared to history? In volatile environments, that distinction matters. Markets may feel stressed, but execution data can reveal whether liquidity has meaningfully deteriorated or simply adjusted.

Complementing T-Cost are measures of intraday volatility and composite pricing width. The Volatility Index captures realized intraday movements for each product, normalized to basis points per day. Unlike forward-looking indicators based on market expectations or option-implied volumes, this index reflects what the market actually realized -- making it especially useful during volatile trading sessions. We also analyze composite width, which measures liquidity by tracking how narrow or wide Tradeweb's composite pricing is.

Together, these measures provide a multidimensional view of liquidity - spanning U.S. Treasuries and U.S. swaps, as well as mortgage-backed securities (MBS) To-Be-Announced (TBA) securities and credit default swap index investment grade (CDX IG) securities - within a single, consistent framework.

Context Across Market Cycles

One of the strengths of Tradeweb's Liquidity Cost Index is historical perspective. With data stretching back several years, investors can compare current conditions with prior stress episodes - from the dislocations of early 2020 to more recent tariff-driven volatility. By anchoring today's liquidity against a broad historical baseline, the index allows participants to assess whether execution costs are elevated in absolute terms or simply in line with past periods of heightened activity.

The framework also highlights how liquidity can diverge across asset classes. In early January 2026, for example, execution costs in MBS rose sharply as markets anticipated large agency purchases, while U.S. Treasury liquidity remained comparatively stable. Without a standardized lens, such differences can be difficult to quantify in real time. Viewing them side by side helps investors better interpret cross-market dynamics and adjust accordingly.

Consider January 9 this year, following the Trump administration's order for Fannie Mae and Freddie Mac to purchase $200 billion in MBS. On that day, MBS T-Cost rose nearly 500% relative to its one-year median, while U.S. Treasury T-Cost remained stable, just below its one-year median.

MBS tightened more than 20 basis points versus Treasuries as markets prepared for increased demand. The indices made the divergence immediately visible: volatility and execution costs in MBS spiked meaningfully, while Treasuries remained orderly.

Without a consistent cross-asset liquidity framework, that contrast would have been far harder to quantify in real time.

A More Practical Benchmark for Market Participants

For institutional investors, standardized liquidity measures are increasingly important. Execution strategies, risk management decisions and performance benchmarking all depend on understanding the true cost of trading. By grounding our indices in realized transaction data and expressing them in intuitive trading terms, we aim to provide a practical reference point - one that reflects what markets delivered, not just what they implied.

As liquidity ecosystems evolve, so too will this framework. We plan to expand the coverage and provide access to live intraday time series in the future, giving market participants even greater transparency into trading conditions as they unfold.

Liquidity may be difficult to define in words. But by measuring it in basis points and ticks - consistently, historically and across products - we can help investors better understand what it truly means in practice.

For media inquiries:

Savannah Steele
+1 646 767 4941
[email protected]

Eloise Doolan
+1 347 930 3055
[email protected]

For questions or more information about Tradeweb's T-Cost Liquidity Index: [email protected]