Long-term interest rates hit record-low levels in 2012 but have since increased substantially. As discussed in an earlier post Leaving the Board, the sharpest increase occurred between May 2 and July 5 of this year, with the 10-year Treasury yield rising from 1.63 percent to 2.74 percent. During the May-July episode, market liquidity also deteriorated. Some market participants Leaving the Board have suggested that constraints on dealer balance sheet capacity impaired liquidity during the selloff, amplifying the magnitude and speed of the rise in interest rates and volatility. In this post, we review the evolution of Treasury market liquidity, evaluate whether dealer balance sheet capacity amplified the selloff, and examine what motivated dealer behavior during the episode. [...]