Central bank officials working under the auspices of the Bank for International Settlements released two reports on Jan. 21 that analyze trends in global fixed income markets.
One report examines liquidity in sovereign and corporate bond markets and related futures markets and finds "signs of greater fragility" in liquidity in benchmark bond markets. The report cites three causal factors: the increased use of automated trading, the reduction in bank risk appetites and "unconventional monetary policies" that have increased the risk of crowded trades.
The other report focuses specifically on electronic trading and its impacts on price discovery and market structure. The report finds that while electronic trading improves market quality during normal times, it may lead to "less robust liquidity" during times of stress. The report looks at case studies from the U.S., German and Japanese fixed income markets and discusses challenges for policy makers, including data disclosure, trading practices and risk management.