Pinter: Transaction prices ‘more than doubled in a matter of days’
The Bank of England has published a working paper analysing market liquidity, investor behaviour and price dynamics during the market disruptions in September-October 2022.
The central bank's staff working paper number 1,019 - authored by Bank of England senior adviser Gabor Pinter and published at the end of last week (31 March) - looked at how selling pressure in gilt markets, due to the deteriorating derivative and repo positions of liability-driven investor, led to evaporating market liquidity, especially in long-dated conventional gilts and index-linked gilts.
The paper found that firms in the liability-driven investment (LDI) sector who had larger repo and swap exposure before the crisis sold more gilts during the crisis - adding that hedge funds were compensated for providing liquidity to the sector.
It found that transaction costs in bond markets quickly soared, particularly for smaller trades, for trades at smaller dealers and for trades of non-LDI investors too.
Pinter said the aggregate dispersion of transaction prices "more than doubled in a matter of days" - noting that price dispersion across primary dealers remained significant throughout the crisis, suggestive of tightened constraints on the intermediary sector.
The paper said that, while the episode started with the forced selling by the LDI sector, its research pointed to "large costs on other market segments as well", consistent with the contagious nature of illiquidity.
