## Fostering Core Government Bond Market Resilience _IMF Blog, May 21, 2025_ ## Source details **Canonical URL:** [Fostering Core Government Bond Market Resilience](https://www.imf.org/en/blogs/articles/2025/05/21/fostering-core-government-bond-market-resilience) ## Other formats - [Markdown version](/en/blogs/articles/2025/05/21/fostering-core-government-bond-market-resilience/index.md) - [Structured JSON version](/en/blogs/articles/2025/05/21/fostering-core-government-bond-market-resilience/index.json) - [Bundle manifest](/en/blogs/articles/2025/05/21/fostering-core-government-bond-market-resilience/bundle-manifest.json) ## Bibliographic details - Authors: Tobias Adrian, Kleopatra Nikolaou, Jason Wu - Published: May 21, 2025 --- ### Importance of government bond market functioning - Government bonds serve as the bedrock of capital markets, acting as benchmarks whose yields influence corporate bonds, mortgages, and derivatives. - Many financial transactions use government securities as collateral for hedging and pricing. - Bond yields reflect economic prospects, risks, and market functioning; yields can rise for fundamental reasons (improved economic outlook or higher inflation expectations) or because investors demand additional compensation for uncertain interest rates (term premium). - If higher risk premia are aggravated by dysfunctions in government bond markets, yields can rise excessively relative to fundamentals, potentially undermining efficient capital allocation. ### Recent performance and identified vulnerabilities - Government bond market functioning demonstrated resilience despite very high volatility; continued stability is essential for the financial system (as described in the latest Global Financial Stability Report). - Markets recently adjusted sharply to an abrupt re-assessment of the global macroeconomic environment and elevated trade policy uncertainty. - Liquidity is multi-faceted and measured by transaction-level metrics (bid-ask spreads, trading volumes, market depth) and model-based methods; different metrics can convey different signals. - Example: bid-ask spreads suggest mild pressure on liquidity in the past few years, while yield curve fitting errors have increased for some of the world’s largest bond markets, suggesting reduced liquidity. - Some episodes show that core bond market liquidity can evaporate quickly in times of stress, and day-to-day liquidity may deteriorate. ### Dealer intermediation dynamics and constraints - Primary dealers bid in auctions on behalf of clients, support secondary-market liquidity, and are the main intermediaries of major government bond markets; most are subsidiaries of large banks and have sizable balance sheets to warehouse inventory and provide financing. - In volatile markets, dealers face rising value-at-risk and other risk metrics, challenging their ability to intermediate; increased dealer perceptions of risk can reduce market-making and amplify illiquidity. - Major bank-dealers have expanded government bond holdings, but not in proportion to outstanding bond growth: - In the United Kingdom, gilts grew twice as fast as UK bank-dealer balance sheets (as shown in the October 2023 Global Financial Stability Report). - The stock of US Treasury securities grew nearly fourfold in the 15 years through 2023, while US bank-dealer balance sheets expanded by just 1.5 times. - US Treasury securities account for almost 70 percent of primary dealers’ securities inventories, the highest share in over a decade. - About three-quarters of primary dealers’ securities financing is also collateralized by Treasuries. - Dealers’ internal limits on concentrated holdings could curtail intermediation, especially in times of stress. ### Role and implications of nonbank financial institutions (NBFIs) - Some NBFIs (mutual funds, exchange-traded funds, insurance companies, and pension funds) are key buyers; others (principal trading firms and some hedge funds) have become important market-makers in specific segments. - The shift toward electronic trading has helped principal trading firms gain market share. - NBFI market-makers can reduce reliance on bank-dealers, increase intermediaries, and improve liquidity, but they may quickly curb activities during market stress due to weaker mandates to support markets. - Past examples: the 2014 Treasury market flash rally and the 2020 global dash-for-cash at the onset of the pandemic. - The increasing presence of NBFIs makes market resilience more uncertain and opaque because they tend to be less regulated and subject to fewer data reporting requirements. ### Policy progress, gaps, and recommendations - Central bank interventions introduced in recent years to stabilize bond markets include asset purchases and lending facilities—primarily through repurchase agreements (repos). - These tools support bond market functioning but are no substitute for structural resilience. - Central clearing mitigates counterparty and default risks, improves transparency, and allows intermediaries to offset long and short positions against a central counterparty, boosting balance sheet efficiency and capacity. - Adoption varies by country: - In Japan, significant shares of both cash and repo transactions are centrally cleared. - The United States only recently introduced a mandate. - In Germany and the United Kingdom, some repo trades are centrally cleared but cash transactions aren’t. - While central clearing does not guarantee resilience, international consensus on its benefits is growing. - Timely and comprehensive market data are crucial; recent volatility revealed data gaps and reporting lags that obscure real-time drivers of market functioning (e.g., selling pressures). - Progress on data coverage has not been uniform across countries; important gaps remain for key participants such as dealers and hedge funds. - Policymakers should: - Broaden central clearing. - Monitor market-making activities, including by nonbank financial institutions. - Obtain better information on NBFIs’ financial soundness, operational resilience (including cyber resilience), and likely behavior under stress. - Dealers should: - Continue to build capital and liquidity during stable times to be able to serve markets under stress. - Complete internationally agreed regulatory reforms for banks to support dealer resilience. *Source: Fostering Core Government Bond Market Resilience, May 21, 2025.* --- ## Content in this bundle - **US Treasury Market Functioning from the GFC to the Pandemic** - [US Treasury Market Functioning from the GFC to the Pandemic (Markdown version)](/medialibrary/media/research/staff_reports/sr1146.pdf.md){rel="alternate" type="text/markdown"} - [US Treasury Market Functioning from the GFC to the Pandemic (PDF)](/medialibrary/media/research/staff_reports/sr1146.pdf){rel="external" type="application/pdf"} --- ## References - [Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2025/04/22/global-financial-stability-report-april-2025) - [Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2023/10/10/global-financial-stability-report-october-2023) _Source: https://www.imf.org/en/blogs/articles/2025/05/21/fostering-core-government-bond-market-resilience_