(Reuters) – Central banks will need to intervene more frequently in bond markets, and monetary policymakers should review regulations for market makers due to rising volatility, the ICMA, an association said bringing together financial market players, as part of a study published Tuesday on the largest government bond markets in Europe.
Although liquidity is satisfactory, it has become more sensitive to volatility, notes the ICMA, which adds that volatility is increasing more quickly than in the past.
When volatility becomes too high, liquidity can disappear in these markets, largely because bank balance sheets have shrunk over the past decade while the size of the markets has increased, details the ICMA.
These episodes are marked by the withdrawal of certain traders from the market – banks responsible for supervising transactions on the interest rate markets. Liquidity also tends to concentrate on the largest banks, which favor their largest customers, the report details.
Participants in the study believe that central banks will have to intervene more frequently in bond markets, according to the ICMA, which reiterates its thoughts already formulated in January.
Monetary policy makers and regulators should also review the prudential regulations that apply to traders, “with a view to recalibrating them to enable traders to fulfill their function”, the study adds.
(Editor Yoruk Bahceli, French version Corentin Chappron, edited by Blandine Hénault)
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