Futures under stress: how did gilt futures behave in the LDI crisis?

Joel Mundy and Matt Roberts-Sklar

When markets are volatile, liquidity tends to worsen. This makes it harder to intermediate buyers and sellers. We saw this during the 2022 liability-driven investment (LDI) stress, when the UK government bond (gilt) market exhibited extreme volatility. This illiquidity was also evident in gilt futures, derivatives that support functioning in the cash gilt market. Gilt futures are traded on an electronic orderbook, meaning we can examine liquidity metrics at very high frequency. Looking across a range of liquidity metrics for gilt futures, we find that liquidity was broadly unchanged following the Monetary Policy Committee’s (MPC’s) decision of 22 September 2022. But market functioning deteriorated heavily following the UK Government’s fiscal statement of 23 September and took a long time to recover.

Continue reading →

Supply chain disruptions: shocks, links, and hidden exposure

Rebecca Freeman, Richard Baldwin and Angelos Theodorakopoulos

Supply chain disruptions are routinely blamed for things ranging from elevated inflation to shortages of medical equipment in the pandemic. But how should exposure to foreign supply chains be measured? Using a global input-output database, this post shows that the full exposure of US manufacturing to foreign suppliers (especially China) is much larger than face value measures indicate. Moreover, it argues that the big change in supply chain disruptions in recent years stems from changes in the nature of the shocks (from idiosyncratic to systemic), not the nature of the supply chains.

Continue reading →

Liquidity resilience in the long gilt futures market

Jonathan Fullwood and Daniele Massacci

Episodes of vanishing market liquidity haunt dealers. This was true in the great stock market crash of 1929 and remains so today: in August 2018, professional corporate bond traders cited vanishing liquidity as their primary source of worry. Dealers in more-liquid long gilt futures – contracts on 10 year UK government bonds – might be less concerned. But have structural changes in the market led to less resilience over time? We address this question in a recent Staff Working Paper. We find that liquidity in the long gilt futures market has increased slightly over recent years, while remaining resilient to periods of market stress.

Continue reading “Liquidity resilience in the long gilt futures market” →