(Reuters) – Central banks will have to intervene more frequently in government bond markets and policymakers should review prudential regulation to make the market more resilient, a provisional study by trade body ICMA said on Wednesday.
“Market participants accept that episodic heightened
volatility, with rapid evaporation of liquidity, and a sharp
repricing of risk, is the new normal,” the International Capital Markets Association said in a provisional summary of a report on bond market liquidity it will publish later in 2024.
The report is based on the biggest government bond markets in Europe.
Study participants believe central banks will have to intervene in bond markets more frequently and systematically to restore stability, ICMA said.
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Policymakers and regulators should also review prudential regulation that applies to primary dealers — banks that manage the trading of governments’ debt — to make the market more resilient, both buy and sell-side participants in the study recommend.
“They suggest that there is a trade-off between high levels
of bank capitalisation and bond market liquidity and
resilience,” ICMA said.
(Reporting by Yoruk Bahceli; editing by Amanda Cooper)