Treasury and Fed Officials Contend that Bond Market Liquidity is Fine

At a Senate Banking Committee hearing last Thursday, April 14th, Counselor to the Secretary of the U.S. Treasury Antonio Weiss and Federal Reserve Governor Jerome Powell insisted that there is neither conclusive nor compelling evidence of an extensive decline in liquidity in fixed income markets as a result of increased regulation, such as Dodd-Frank.

Weiss testified that liquidity is “well within historical levels,” despite persistent concerns expressed by some market participants to their legislators, according to a recent MarketWatch article. Despite requests from Republican senators for Weiss and Powell to point to Dodd-Frank regulations as contributing factors for market participant complaints about liquidity issues in fixed income markets, Powell was steadfast that the financial system was “safer, sounder, more resilient, and less risky” now than before the financial crisis. “Dodd-Frank regulations get the credit,” said Powell, and Weiss concurred.

Weiss attributed the recent turmoil in the fixed-income markets to several structural changes “driven by technology, changing risk appetites and business models, much-needed financial reform, and changes in the investor base” that are ongoing. However, the “core of the financial system” has been strengthened by reforms adopted in response to the crisis, according to Weiss.

This opinion is in stark contrast to SFIG’s recent testimony before the House Financial Services Committee regarding the effects of Dodd-Frank and Basel requirements on ABS liquidity. SFIG Executive Director Richard Johns stated, “We are already seeing that the new liquidity and capital rules have negatively impacted the market and reduced liquidity. There is a very real danger that these rules will restrict the supply of funding to an extent that could cause harm to important sectors of the real economy.”

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