Despite concerns of perceived a decline provincial bond market liquidity and activity, there is no evidence of a decline, according to a recently published staff note from the Bank of Canada.
Concerns about the secondary market for provincial bonds were raised in a 2016 survey conducted by the central bank. The perceived deterioration in liquidity was generally blamed on, “regulatory or technological changes that reduced dealers’ ability or willingness to act as market makers,” central bank researchers state in the staff note.
However, the researchers find that the provincial bond market has “been resilient since 2010.”
Although the research finds that a proxy for the bid-ask spread has worsened, “all other measures of liquidity and trading activity are stable or have improved.”
“These results are consistent across bonds from different provinces, older and newer bonds, and bonds of different sizes,” the note states.
Other indicators of a perceived decline in liquidity, such as firms breaking large trades into smaller transactions and taking longer to execute their trades, are not evident in the provincial markets. “Our data provide no evidence that any of these changes have occurred in the provincial bond market,” the note states.
One exception to its findings is Alberta, where trading activity in Alberta bonds “has grown considerably in recent years as a result of the large increase in issuance after the oil price shock.”
“We interpret the evidence as a sign of resilience in provincial bond markets,” the researchers conclude.