Despite ongoing industry concerns about bond market liquidity, European regulators announced on Tuesday that their research finds that liquidity has improved in sovereign bond markets.
The European Securities and Markets Authority (ESMA) acknowledged in a statement that recent episodes of short-term volatility and liquidity stress “have increased concerns about the worsening of secondary market liquidity,” but also reports that its latest research finds that, amid supportive monetary policy conditions, “market liquidity seems to have improved in the European sovereign bond segment.”
ESMA analyzed daily data for sovereign bonds for 10 European countries from January 2006 to December 2016, which covers both periods of market stress and more positive market conditions. Lacking regulatory data, the ESMA says that it based its research on a commercial dataset that includes 2,680 sovereign bonds.
“Measuring the liquidity of the sovereign bond market liquidity is of fundamental importance for market participants and policymakers alike,” ESMA says. “Market liquidity plays a central role when issuing new debt, in the transmission of monetary policy and, more generally, in ensuring the orderly functioning of financial markets and financial stability.”
Nevertheless, the ESMA also says that the apparent increase in sovereign bond liquidity, “stands in contrast to the corporate bond sector, in which there have been phases of lower liquidity in more stressed periods.”