Global fixed income market fragile -- BIS

MANILA, Philippines - The Committee on the Global Financial System (CGFS) and the Markets Committee has released two reports on the structure and liquidity of fixed income markets. The Bank for International Settlements serves as a guide to both bodies.

The CGFS report on the 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.

CGFS chairman and president of the Federal Reserve Bank of New York William Dudley said the fixed income markets are in a state of transition.

“So far, the effects of ongoing regulatory, technology and market structure changes do not appear to have large, persistent effects on the price of liquidity services for most major asset classes, but rather reflected in increasingly fragile liquidity conditions,” Dudley said.

The report identifies the key drivers of change which are:

• 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 trading and one-sided risk expectations on the part of market participants.

The Markets Committee report entitled “Electronic trading in fixed income markets,” focuses on the first driver and finds that the rise of electronic trading in fixed income markets tends to facilitate the matching of buyers and sellers.