2023 Bond Market Seminar

On Wednesday 26th April 2023, the Brunel Banking Research Group held a research seminar on the topic of “Financial Stability and Government Bond Markets”. With contributions from some of the world’s leading authorities on bond market dynamics, this seminar assessed related financial stability risks and links to policy and pricing, with a particular focus on bond-market performance in March 2020 as COVID became a global influence and in the UK gilt market in September 2022. This high-level research seminar (along with our Annual Banking Conferences in 2018, 2019, 2021 and 2022) underline the development of Brunel as a centre of research and teaching in banking economics, the latter being reflected in the introduction of the BSc in Banking and Finance to complement the long standing Banking and Finance MSc, both of which are proving highly popular with students.

The presenters were Dr Bill Allen (visitor at the National Institute for Economic and Social Research), Professor Darrell Duffie (Adams Distinguished Professor of Management and Professor of Finance at the Graduate School of Business, Stanford University) and jointly Professor James Steeley (Professor and Head of Department of Economics and Finance, Brunel University) and Mahnaz Oliaie (Doctoral Researcher, Brunel University).

All of the presenters are world experts on the topics of the seminar. Dr Allen had a distinguished career at the Bank of England, focused in particular on market operations, and was more recently was a specialist advisor with the UK House of Commons Treasury Committee. In 2022 he gave evidence to the House of Lords Economic Affairs Committee on quantitative easing, In the context of his career as a world-leading academic, Professor Duffie was inter alia chair of the Financial Stability Board’s Market Participants Group on Reference Rate Reform and is at present a Resident Scholar at the Federal Reserve Bank of New York. A recent FRBNY paper with Frank Keane “Market-function asset purchases” offers further insight on the topic of the seminar. Professor Steeley worked at the Bank of England in the 1990s, where he managed a research team inter alia developing techniques to improve the pricing of UK government debt issues; since then he has spent an academic career in large part conducting research on the UK gilt market. Ms Oliaie is preparing a PhD examining the effects of quantitative easing on the cost of issuing UK government debt. Prior to Brunel, she obtained a Master of Financial Management degree from Alzahra University, Tehran, writing a thesis on The Stability of Financial Markets in Iran. Seminar organisers were Prof. E Philip Davis (philip.davis@brunel.ac.uk), Dr. Dilruba Karim (dilly.karim@brunel.ac.uk) and Dr. Ka Kei Chan (kakei.chan@brunel.ac.uk).

Links to the presentations follow – the reader is warmly encouraged to read them attentively!:

Bill Allen (National Institute of Economic and Social Research) "Debt management, monetary policy and quantitative tightening” 

Darrell Duffie (Stanford University) "Rescuing the government securities market when its liquidity fails" 

James Steeley and Mahnaz Oliaie (Professor and Head of Department of Economics and Finance, Brunel University and Doctoral Researcher, Brunel University) "The issuance costs of UK government debt: 1987 - 2022". 

The conference presentations raised a rich range of challenges and questions for future research and policy consideration, including the following:

· Why has market maker capacity in the government bond markets been diminishing since the Sub-Prime crisis?

· Can central bank lending, or perhaps a formal standing facility, provide sufficient support to market makers in times of low liquidity? Or should the authorities provide a formal arrangement for acting as “market maker of last resort” for occasions when market makers are unable to provide sufficient liquidity? (In practice this would mostly be as “buyer of last resort” as they would usually be buying and not selling.)

· Should such a “buyer of last resort” be the central bank or should it be the ministry of finance? If it is the former, would that be a risk for central bank independence and of fiscal dominance?

· How can we distinguish times when a “market maker/buyer of last resort” needs to function? What are the best indicators of such a situation, for example in terms of market maker capacity?

· What would be the trade-off between moral hazard due to the “market maker/buyer of last resort” giving an effective liquidity guarantee and lower yields due to resulting investor confidence?

· How can a central bank distinguish between quantitative easing/tightening for monetary policy purposes and asset purchases and sales required solely for bond market stabilisation?

· What is the relation of price volatility to the functioning of government bond markets?

· How can governments best act to minimise cost of government bond sales (e.g. by size and timing of syndications, auctions etc. in light of market conditions?)

· What are the factors that distinguish a “flight to quality” in government bonds that is stabilising (such as Russia/LTCM in the US in 1998) and one which is destabilising (e.g. 2020 globally)?

· How can quantitative tightening be undertaken in a manner that does not provide further market instability, given the implied high levels of supply to bond markets such as the UK?

· What is the appropriate capital regulation of banks acting as market makers in government bond markets? And of those holding such bonds as an asset (notably in light of the recent failure of Silicon Valley Bank?)