(The opinions expressed here are those of the author, a

columnist for Reuters)

By Jamie McGeever

ORLANDO, Florida, March 11 (Reuters) - Levels of open

interest in the U.S. Treasuries futures market rarely garner

much attention, but this might be one of those occasions, as

President Donald Trump's tariff agenda threatens to slam the

brakes on the U.S. economy, perhaps even putting it into reverse

gear.

Commodity Futures Trading Commission figures show that open

interest, the broadest measure of investors' exposure to U.S.

bond futures, is sliding at a historic pace. In some cases, such

as two-year contracts, the fall is the sharpest on record.

In the week through March 4, open interest in two-year

futures fell by a record 396,525 contracts, or nearly $80

billion. That's around 10% of investors' total exposure, and it

means overall open interest is down 17% from its peak around the

U.S. presidential election in November.

Open interest in the 10-year space fell by 503,744

contracts, or $50 billion, the third biggest weekly fall on

record and again around 10% of total exposure.

The value of open interest across two-, five- and 10-year

contracts fell by $179 billion in the week to $1.858 trillion,

the lowest since June last year. More significantly, this marked

a notable 9% decline in a single week.

Why does this matter? As a paper by Federal Reserve staffers

Andrew Meldrum and Oleg Sokolinskiy found last month, cash

market depth "significantly affects liquidity fragility in all

maturity sectors" of the Treasury market. In other words, the

slump in open interest could mean that one of the world's most

important markets has become easier to disrupt.

'POINT OF CONCERN'

Some of this activity is seasonal, as funds are rolling

their positions into new benchmark contracts. And some is

related to the so-called basis trade, the arbitrage play used by

hedge funds to exploit the tiny price difference between cash

bonds and futures.

So far, so normal, in which case open interest should pick

up again in the coming weeks as investors of all stripes -

particularly asset managers on the 'long' side and hedge funds

on the 'short' side - rebuild their exposures.

But the sharp moves are coming at a time of heightened

volatility and uncertainty across all markets. Wall Street and

U.S. Big Tech have borne much of the brunt, with around $5

trillion wiped off the value of U.S. stocks in the last three

weeks. But volatility is on the rise everywhere.

Treasury yields have tumbled around 60 basis points in the

last month, and implied volatility as measured by the MOVE index

this week rose to its highest in four months.

True, there has been no sign of market dysfunction despite

the big price moves, but room for complacency is shrinking.

"Uncertainty could keep some investors away," said Gennadiy

Goldberg, head of U.S. rates strategy at TD Securities. "If open

interest doesn't come back it could be a sign that risk managers

are deleveraging. Right now it's something to watch closely

rather than a point of concern."

RECORD FALLS

Much of the decline in recent months is down to leveraged

funds reducing their 'short' positions more aggressively than

asset managers scaling back their corresponding 'long'

positions, suggesting speculators are deleveraging.

The value of leveraged funds' aggregate short position

across two-, five- and 10-year contracts is now $970 billion.

That's down by almost a fifth from the record high of $1.186

trillion in November last year.

This is probably not a bad thing and will likely please

regulators who had warned that a disorderly unwind of funds'

basis trades could pose major financial stability risks. That

hasn't played out.

But further reduced open interest from here at a time of

rising volatility might put liquidity, prices and investors'

ability to trade under greater strain.

As Meldrum and Sokolinskiy note, "Times of low market depth

are associated with an increased probability of low liquidity

states in the future."

And at this delicate juncture, anything that impacts

liquidity in the world's most important market is certainly

worth monitoring.

(The opinions expressed here are those of the author, a

columnist for Reuters.)