The Committee on the Global Financial System (CGFS) and the Markets Committee released two reports on the structure and liquidity of fixed income markets.
The CGFS report, Fixed income market liquidity, finds signs of greater fragility, with liquidity conditions being more susceptible to disruptions, such as sudden stops of liquidity in key segments of the market and a deterioration of market depth metrics.
“Fixed income markets are in a state of transition,” said CGFS Chairman William Dudley, President of the Federal Reserve Bank of New York. He added: “So far, the effects of ongoing regulatory, technology and market structure changes do not appear to have had large, persistent effects on the price of liquidity services for most major asset classes, but rather have been reflected in increasingly fragile liquidity conditions.”
The report identifies the key drivers of the change as:
- the rise of algorithmic trading in fixed income markets, which may accelerate the rate at which seemingly ample liquidity can evaporate after the first signs of stress;
- banks’ trimming of trading-related exposures in response to lower risk appetite in the wake of the financial crisis and to more demanding regulatory requirements; and
- unconventional monetary policies, which can give rise to crowded trades and one-sided risk expectations on the part of market participants.