Bank of England Governor Mark Carney said officials are monitoring whether the fixed-income market is vulnerable to liquidity risks.
A shock such as a change in monetary policy or another “fundamental event” could cause liquidity to dry up, Carney said at the Inclusive Capitalism conference in London on Friday. That might leave some asset managers holding securities that were liquid only under “the best market conditions virtually of all time.”
“The bouts of illiquidity we have seen in the past year have not been driven truly by some fundamental change, they’ve been driven as much by market technicals, which should be a salutatory warning,” Carney said. Central banks are “shouting out that this is an issue, investors should prepare,” he said.
A global bond-market rout that started in April has erased more than half a trillion dollars in the value of sovereign debt. That’s raising officials’ concerns about investors’ preparedness to manage a tightening of monetary policy, through interest-rate increases or a reversal of debt purchases.
Markets are “going to be more volatile than in the recent past, a period where volatility has been suppressed, including by central-bank policy,” the BOE governor said. “We do want to make sure that there aren’t structural issues, that there’s not unnecessary volatility or that the price of liquidity is excessive.”
Carney will present the U.K. central bank’s semi-annual assessment of financial stability risks at a news conference in London on Wednesday. An interim analysis published in March showed officials were monitoring a drop in sovereign bond yields to historical lows or below averages.
At the same event last year, Carney said “the combination of unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption in some of these markets has eroded social capital.”
The BOE has since concluded its Fair and Effective Markets Review, which set penalties to promote individual responsibility of senior managers for conduct at their firms.
The new standards “bring that social capital, that sense of social responsibility, back in,” Carney said Friday.