On January 21, 2016, two international central bank committees published reports on the structure and liquidity of fixed income markets. The Committee on the Global Financial System’s report is on fixed income market liquidity whilst the Markets Committee paper is on electronic trading in fixed income markets. The CGFS report identifies liquidity conditions to be prone to disruptions, with signs of fragility, as fixed income markets are seen to be in a period of transition following the effects of ongoing regulatory, technology and market structure changes. The report states that whilst it is difficult to identify the drivers of such fragility, the changes could be due to: (i) a rise in algorithmic trading in fixed income markets; (ii) banks reducing their trading-related exposures in response to lower risk appetite; and (iii) crowded trades and one-sided risk expectations for market participants. The Markets Committee report focuses on the rise in algorithmic trading, which tends to facilitate the matching of buyers and sellers and in turn usually improves market quality, but can also result in liquidity conditions that are less resilient in times of stress.

The CGFS report is available at: http://www.bis.org/publ/cgfs55.pdf and the Markets Committee report is available at: http://www.bis.org/publ/mktc07.pdf.