ICMA publishes a new paper on liquidity and resilience in the core European sovereign bond markets


5 March 2024 ICMA has published an in-depth analysis of liquidity and resilience in the core European sovereign bond markets. Using data analysis, modelling, as well as interviews with sell-side and buy-side market participants, the report attempts to identify potential vulnerabilities in underlying market structure.

Focused on the five largest European sovereign bond markets (Germany, France, Italy, Spain, and the UK), some of the key findings of the report are: 

  • Liquidity in the core European bond markets is generally good, but in recent years liquidity has become much more sensitive to both episodes of unexpected volatility and regulatory reporting dates
  • The speed at which markets become volatile (the ‘volatility of volatility’) has increased. 
  • Repo markets function well, even in times of heightened stress, but are also subject to sharp drops in liquidity around reporting dates
  • Liquidity in the sovereign bond futures markets is generally good, although limited to a few contracts, and again prone to a rapid thinning and widening of prices in times of stress 
  • Market participants accept that episodic heightened volatility, with rapid evaporation of liquidity, and a sharp repricing of risk, is the new normal 
  • Participants also believe that central banks will be required to intervene in bond markets more frequently and systematically to restore stability 
  • The consistent recommendation from market participants, both sell-side and buy-side, to make sovereign bond markets more resilient, is that policy makers and regulators should review the design and calibration of prudential regulation as it applies to primary dealers  

The report is intended to be the first in a series of reports, part of ICMA’s Bond Market Liquidity Taskforce initiative, which will look at other key bond markets. 

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