Opinion still divided on the functioning of the fixed-income market
riks, RIX-INST, commercial paper

Opinion still divided on the functioning of the fixed-income market

December 3, 2019

Opinion remains divided on how the fixed-income market is functioning, but more participants consider that the market generally functions poorly or very poorly than consider that it functions well. This is shown by the Riksbank’s Financial Markets Survey conducted in October. As previously, they specify the main reason for this as a lack of liquidity resulting from tightened regulations and the Riksbank’s government bond purchases.

According to participants, the main developments that could have a negative impact on the Swedish financial system would be an escalation of the trade conflict between the United States and China and a global economic slowdown. Other risk factors mentioned include the Swedish housing market, a disorderly British withdrawal from the EU, credit and liquidity risks, cyber risks and tightened regulatory systems affecting the functioning of the market.

The participants who have reduced their risk-taking state international uncertainty as one of the reasons for this. Market makers in particular have reduced their risk, while investors have instead increased theirs in a search for yield. However, a majority of participants describe their risk taking as low or neutral.

Most participants consider themselves to be well prepared to manage credit or counterparty risks, market risks and liquidity risks. One participant in three states that they are well prepared to manage cyber risks and even fewer, only one in five, see themselves as well-prepared to manage climate-related risks.

Half of participants consider that foreign exchange trading in Swedish kronor functions well and only one participant in seven considers that it functions poorly. Several participants state that a less expansionary monetary policy – with a higher repo rate and reduced purchases and holdings of government bonds – would improve the functioning of both the foreign exchange and fixed income markets.

THE FINANCIAL MARKETS SURVEY

Twice per year, the Riksbank conducts a survey among Swedish and foreign participants on the Swedish fixed income and/or foreign exchange markets. A total of 66 participants responded to the autumn survey, conducted between 1 and 16 October. The survey forms a complement to the regular contacts the Riksbank has with the market.

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