FSB analyses liquidity in core government bond markets
21 October 2022
This report, which forms part of the FSB’s work programme to enhance the resilience of non-bank financial intermediation (NBFI), analyses the liquidity, structure, and resilience of core government bond markets.
The Financial Stability Board (FSB) published today a report on liquidity in core government bond markets. The report forms part of the FSB’s work programme to enhance the resilience of non-bank financial intermediation (NBFI).
Changes in core government bond markets over the past decade may have
made them more prone to liquidity imbalances in times of stress. The
severe dislocations experienced in those markets during the March 2020
turmoil were the outcome of large spikes in the demand for liquidity by
various market participants, especially non-banks. Unlike the typical
case of being a ‘safe haven’ in periods of stress, government bond
markets experienced a ‘dash for cash’ as investors scrambled to sell
highly liquid assets to fulfil their cash needs. This included sales of
bonds to meet redemptions and/or margin calls, as well as to unwind
leveraged positions.
Bank dealers increased their trading activities to some extent, but
this was not enough to counterbalance selling pressures. Other liquidity
providers did not appear to sufficiently increase their intermediation
activities, while the behaviour of other market participants varied
across FSB member jurisdictions. Central bank interventions were
effective in alleviating market strains, but they are not without cost
and should not substitute for the obligation of market participants to
manage their own risks appropriately.
The report outlines policies to consider for enhancing the resilience of core government bond markets, including measures to:
-
mitigate unexpected and significant spikes in liquidity demand by
non-bank investors. This involves assessing and mitigating factors that
give rise to such spikes, e.g. liquidity mismatches, margining practices
or the build-up of leverage.
-
enhance the resilience of liquidity supply in stress. This involves
exploring potential ways to increase the availability and use of central
clearing for government bond cash and especially repo transactions, as
well as the use of all-to-all trading platforms.
-
enhance market oversight, risk monitoring and the preparedness of
authorities and market participants. This involves increasing the level
of transparency in government bond markets and closing some of the
substantial data gaps identified in the report.
Notes to editors
The report published today follows up on the Holistic review of the March 2020 market turmoil,
published in November 2020, which laid out a comprehensive and
ambitious work programme to enhance the resilience of the NBFI sector.
This work is being carried out within the FSB as well as by its member
standard-setting bodies and international organisations, to ensure that
relevant experiences and perspectives are brought to bear.
FSB
© Financial Stability Board
