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Government bond market liquidity

Author: AnGuoJun From: www.yourpaper.net Posted: 2009-03-31 16:37:04 Read:
Abstract: The key to the government debt management is to establish a highly liquid secondary market. Factors affect the liquidity of the government bond market, including product design, market structure, trading mechanisms, information disclosure and tax issues. Ways to improve market liquidity, including the competitive structure of the transaction, to minimize the negative impact of the tax on the liquidity and improve the transparency of trading information, standardization of trading and clearing operations, market participants diversify determine core assets to meet the benchmark debt market demand, improve the function of the repo market and the derivatives market, foster institutional investors full market supervision.
Keywords: government debt management; bond market; liquidity

The fluidity comparison of the government bond market

The primary responsibility of the government debt management is government financing, not only to try to lower financing risks, should also try to reduce financing costs. The price of the bond is determined by a variety of factors, including the issuer's credit, market capacity, securities rarity. Secondary market liquidity is an important factor. Modern financial theory, the efficient market prices to fully reflect all available information in the market, according to market microstructure theory, the core issue of the securities market is the market efficiency measure is valid indicators of a market usually has four: liquidity stability, transparency and transaction costs. Mobility is known as the lifeline of the efficiency of the securities market and financial markets. Improve liquidity of the bond market to promote the bond market's price discovery function more adequately reflects the bond liquidity level and improve the efficiency of the bond market or logo Government Debt Management and major macroeconomic impact factors .

The current view is widely recognized that a liquid market participants can rapidly execute large transactions has no greater impact on price formation in the market. In terms of liquidity measures, more representative Kyle (1985), he put forward a market-maker system market liquidity measurement method, that is measured through three levels of tightness, depth and resiliency. Market tightness (Tightness), the degree of deviation from the true price of the transaction price, which reflects the cost paid by the investors to obtain liquidity. General measure of the tightness of the bid-ask spread quoted by market makers (BID-ASK SPREAD), depth (Depth), that can be achieved under the current price level of trading volume, reflecting the market makers in the current price are willing and able traded quantity, we usually use a period Treasuries turnover or turnover rate (turnover ratio, trading volume / listed debt balance) to measure the depth of the bond trading, this indicator more accurately reflects the real trading volume of government securities and the relationship between the amount of potential transactions, easy to be used for different size of the market for comparison. Restore elasticity (Resiliency), being the transaction price deviations to the real price or equilibrium speed and ability. For measuring elastic reasonable indicators have not reached a consensus, one way is to study the speed reset after the completion of the transaction in the normal market conditions (such as bid-ask spread, or the volume of orders).

Government bonds of developed countries countries its zero credit risk characteristics and market participants as a basic investment instruments held. Comparative analysis (Table 1), may initially draw the following conclusions: (1) has a larger balance of government bonds market liquidity indicator on the spot market of the world's top 10 industrial countries (G-10) does not necessarily bidding spreads than narrow market. For example, in Japan, the balance is quite large, but its spread is not narrowed. (2) higher trading volume ratio (the proportion of transactions account balance) is usually closely linked to the bidding spreads and narrower. Britain is the only exception, with the decline in the proportion of trading volume, bidding spreads instead of narrowing. (3) such longer period as is usually accompanied by wider spreads. This reflects the remaining period longer bonds inherent price more volatile. (4) of newly issued bonds (On-The-Run Issues) bidding spreads significantly narrower than the old debt (Off-The-Run Issues), that the liquidity of the former than the latter.

Table 1 it is the comparison of the government bond market liquidity





United States

Bid-ask spread







5-year bonds






10 years






30 years












Annual trading volume












Note: The national debt is fixed rate bonds; until the end of 1997, data table; translated in which the exchange rate by the end of 1997. Balance and transaction volume in units of $ 1 billion. Japan 5-year bonds in the six-year period is calculated on the basis of 30-year government bonds in the 20-year basis.

Source: International Settlements Bank statistics (1999).

Affect the system of the government bond market liquidity factors

First, the product design

(1) issue size

The issue size is an important factor affecting liquidity. For example, in 1992, the Canadian fixed-income benchmark debt issue size is increased, the proportion of trading volume correspondingly increased. Issue size and the bid-ask spread of newly issued bonds for specific comparison show that the issue of the scale of the increase will result in the bid-ask spread is relatively narrow.

(2) The maturity distribution

Government to consider the choice of the newly issued bonds deadline to the balance point. On the one hand, if the duration of newly issued bonds did not meet the expectations of investors, then the latter will require an additional yield premium as compensation, which will raise the government's financing costs. If, on the other hand, excessive period of newly issued bonds, the size of each period will be reduced, thereby reducing the liquidity and investors required to obtain the liquidity premium will raise the government's financing costs.

Variety term structure of government bond market arrangements should take into account the volatility of bond prices, as well as investors' risk aversion. Investors different levels of risk aversion, reflected in a preference for a different location in the yield curve on government bonds varieties. A higher degree of risk aversion, investors choose short-term varieties, low risk aversion of investors choose longer duration varieties. Degree of investor risk appetite in the market vary widely, even if the same investors at different times, the risk appetite because of the changes in the structure of its balance changed. Market maturity period structure, in varying degrees, to meet the multiple needs of investors, investors can, at any time in the different varieties the investment transformed, therefore, market activity, liquidity like. Conversely, if the uneven performance of the market in the term structure, the lack of some of the maturity period for investors to choose, when bond investors hope to change the portfolio's risk factor, unable to timely achieve the transformation of investment products, investors can only take the delayed transaction or other markets to meet the demand of the strategy, the liquidity of the market is bound to be affected.

At this point, G-10 countries seem to follow a similar path - most of the countries trying to maturity structure distribution in four areas: short-term (one year or less than one year), medium-term (1-5 years) and long-term ( 5-10 years), ultra-long-term (10 years). Table 2. Since the deficit and debt levels of recent years, many countries have shown a downward trend, a corresponding reduction in the duration of species and increase the average issue size. For example, beginning in 1992, Canada will be fixed rate of interest bond issue is focused on four key period (2 years, 5 years, 10 years and 30 years) and a corresponding increase in the benchmark bond issue size. The United States to stop the 3-year bonds issued in order to adapt to the reduced financing needs. Most countries the existing bonds continued issue (Reopening) on ??a regular basis in order to establish a larger basis.
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