This report forms part of the FSB’s work programme to enhance the resilience of non-bank financial intermediation (NBFI). It analyses the liquidity, structure, and resilience of core government bond markets.
Government bond markets play a critical role in financing government activities; as a ‘safe haven’ in periods of stress; as a benchmark for the pricing of other (risky) financial instruments; as a key collateral asset (particularly as markets have migrated towards secured lending); and in capital and/or liquidity regulatory requirements for a number of financial institutions, such as banks and money market funds.
These markets, are usually very liquid in normal times and often more liquid than other markets in times of stress. However, in March 2020, following the outbreak of the COVID-19 pandemic, many of these markets experienced extreme dislocations and deteriorations in liquidity conditions.
Building on relevant analysis by FSB member authorities and other international bodies, the report:
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takes stock of recent changes in the structure and liquidity of core government bond markets;
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analyses the changes in government bond market liquidity (and related repo and futures markets) in March 2020, including the behaviour of various market participants (particularly dealers);
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examines the drivers of market participants’ behaviours; and
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identifies factors that promote the resilience of government bond markets.
The report concludes with some policy implications.