Where have the liquidity gone? - an analysis of liquidity in the fixed income markets

Specialeforsvar ved Maria Holm Rasmussen

Titel: Where have the liquidity gone? - an analysis of liquidity in the fixed income markets

Abstract: This paper shows that the liquidity in the Danish fixed income market overall has dropped since mid-2015. This follows several years where the liquidity was perceived as good by the market and where the Danish covered bonds have been qualified as extremely high liquid assets in recent regulations from the European Union. But in the recent years the Danish fixed income market have been under pressure from especially two sides. In the start of 2015 there was a high foreign currency inflow from investor
speculating if Denmark could maintain their peg towards the Euro, which led to several months with no government bonds auctions and a decrease in their liquidity. Regulations coming from both Denmark and the European Union have also had its impact on the market. The number of bonds has increased, leading to a higher amount of illiquid bonds, and there have been an increased focus on the outstanding amount. But most of the regulations have only been formulated and has not yet been adopted into law. However, this has not lowered their impact on the market and the Danish banks have lowered their market maker positions due to their increased capital requirements. This has created the
risk of the Danish fixed income market being in a liquidity spiral. The liquidity is lower than in recent years and the uncertainty of the future with the impact of regulations have created a fear of a further decline in liquidity, which is increasing the illiquidity experienced at the moment. I have made several tests of the liquidity of the covered bonds, which shows that the liquidity in the callable market has decreased in recent years and the adjustable-rate mortgage market has changes characteristics in recent years.
The floater market seems to have become more liquid in the recent years mainly
driven by the outstanding amount

Vejleder: Rolf Poulsen
Censor:  Jesper Lund, CBS