The Tell: Goldman Sachs warns of broad-based deterioration in market functioning

Ozan Kose/Agence France-Presse/Getty ImagesRecent stress in the banking sector isn’t the only sign that something is breaking or about to crack in the wake of the Federal Reserve’s yearlong rate-hike campaign.On Tuesday, Goldman Sachs GS warned that it’s seeing signs of a broad-based deterioration in market functioning and a “material uptick” in most of the indicators it follows to gauge market impairment across assets. “A closer look reveals much of the stress to be stemming from the Treasury and funding markets,” said Ravi Raj, a rates strategist and quantitative economist at the firm.Out of almost three dozen indicators, seven were in a red zone as of Monday and in the highest percentile of the firm’s “Temperature Check” chart, meaning they show the most signs of impairment or stress relative to the past five years, Raj said in an email to MarketWatch. Those red-hot readings include the UST Bloomberg Liquidity Index and the 10-year security’s market depth, which refers to the market’s ability to absorb large orders without significantly impacting the underlying price.Source: Goldman Sachs Global Investment ResearchTuesday’s warning from Goldman Sachs came on a day in which investors seemed willing to look past the banking sector’s problems, for now. As financial markets turned to Wednesday’s policy update from the Fed, Treasury yields shot higher across the board, sending the 2-year rate BX:TMUBMUSD02Y to its biggest one-day jump since June 5, 2009. Meanwhile, U.S. stocks DJIASPXCOMP finished higher. Last year, traders, academics and other analysts raised concerns that the Treasury market was fragile, potentially even vulnerable to becoming the source of the next financial crisis, should there be large-scale forced selling or some other surprise.

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