Assistant governor of the RBA, Guy Debelle, today addressed the 4th Australian Regulatory Summit on bond market liquidity. Bond market liquidity has been a hot topic since regulatory changes largely forced global investment banks to withdraw from market making activities and proprietary trading post the GFC. The reduction in secondary market liquidity, the ability of funds to shift large portfolios of bonds quickly and with minimal market impact, has concerned large market participants including Bill Gross and the Bank of England’s Mark Carney because in a crisis it will be more difficult for funds to exit positions. In a market environment where there are many ‘crowded trades’ – that is, many funds positioned in similar ways to each other – investors rushing to escape a trade when sentiment turns might cause unprecedented volatility and price movement.
Debelle says that “it is generally a little more costly to transact in the same volumes, with immediacy, in the Australian bond markets than it used to be. These changes are partly a response to regulation and partly a reassessment of business models by banks.” Of course measuring liquidity is a challenging task so the assistant governor looks at bond market turnover, derivative turnover and the depth of markets.
