Fed Governor Brainard Acknowledges Regulatory Impact on Bond Market Liquidity

On Monday, March 7th, Federal Reserve Governor Lael Brainard highlighted the liquidity issues in the bond market during her speech, “An Update on the Outlook, Liquidity, and Resilience.” Brainard recognized that there are some liquidity strains, especially in the high-yield bond market, but noted that these are worth the increased security offered by banks holding fewer risky assets, according to a recent Business Insider article.

"While acknowledging the role of regulation as a possible contributor, it is important to recognize that this regulation was designed to reduce the concentration of liquidity risk on the balance sheets of the large, interconnected banking organizations that proved to be a major amplifier of financial instability at the height of the crisis," said Brainard.

She went on to concede that, "there may be some deterioration in the resilience of liquidity at times of stress, along with a greater incidence of outsized intraday price movements... Relatedly, liquidity appears to be more segmented based on the characteristics of the securities being traded and the underlying structure of the markets in which they are traded."

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