On 16 February 2017, following the release of the ECB’s January meeting accounts, French government bond (OAT) futures experienced a so-called ‘mini flash’, with yields falling 11bps within 85 seconds, in a period of significant illiquidity, before retracing most of the move within eight minutes.
Yuliya Baranova, Louisa Chen and Nicholas Vause.
Many investors report recent declines in market liquidity, suggesting dealers have become less willing to trade corporate bonds and other fixed-income securities due to additional costs of holding them on their balance sheets. Some fear that if asset managers began to sell these securities then prices could fall sharply. Focusing on high-yield corporate bonds, we use an econometric model to investigate whether the typical responses of dealer inventories and market prices to falls in asset manager demand have changed in recent years. We find that dealer holdings act less as a shock absorber than they did around a decade ago. Instead, bond spreads rise more. We also find that greater declines in issuance now follow these shocks.