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In
recent years markets have contended with a series of revolutions
in borrowing, market structure and federal regulations enacted
after the 2008 financial crisis.
These developments have fueled concerns that liquidity is drying
up across fixed-income markets, Powell said in testimony before
a United States Senate panel adding "although many recent
studies have found it difficult to identify such a broad
reduction."
"It may be that liquidity has deteriorated only in certain
market segments," he said in remarks before the economic policy
subcommittee of the Senate's banking committee.
"It may also be that, even if liquidity is adequate in normal
conditions, it has become more fragile, or prone to disappearing
under stress," he said.
Powell cautioned mutual funds and other investors in the
corporate bond market about recent record levels of borrowing.
With dealer balance sheets shrinking, he said, buyers now bear
greater liquidity risk.
There are signs that liquidity is improving in corporate debt,
such as declines in estimated bid-ask spreads, but "there is
some evidence that liquidity has deteriorated for the
lowest-rated bonds," he also said.
In the Treasuries market, changes in technology have allowed
trading to move "at extreme speed," and may have "led to greater
liquidity risk, or sudden declines in liquidity." At the same
time, changes in the market structure have led to smaller
average trades, making it hard to see "the effect of trading on
prices" and measure liquidity.
The post-crisis regulations have affected liquidity, leading
both to increases and decreases, Powell said.
"Some reduction in market liquidity is a cost worth paying in
helping to make the overall financial system significantly
safer," he said.
(Reporting by Lisa Lambert; Editing by Fiona Ortiz)
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