BOE flagging risk of illiquidity in government bond markets

Bloomberg

The Bank of England (BOE) flagged instances of illiquidity as a broader risk to the financial system after a rout in some government bond markets pushed yields higher.
The comments in a routine assessment of threats to the financial system indicate concerns at the central bank that Governor Andrew Bailey has sought to play down. The bank’s Financial Policy Committee found that vulnerabilities in
the market remain almost a year after they first emerged during a rout at the start of
the coronavirus (Covid-19) pandemic.
In recent appearances, Bailey has said that while officials are watching a surge in bond yields carefully, so far they viewed it as consistent with an improvement in economic outlook. The summary of the FPC’s meeting agreed with that assessment, but also highlighted risks to liquidity that were exposed by the sell-off in debt markets in March 2020.
“In February, the fragile nature of liquidity in some government bond markets had been evident during a period where advanced economy government bond yields had risen markedly,” the BOE report said. “The FPC judged that recent experience showed the fundamental vulnerabilities in market functioning that had been exposed during the ‘dash for cash’ remained and could amplify any further repricing.”
The central bank noted recent weak demand from non-dealers at US Treasury auctions after a disastrous sale last month that helped push yields to a higher plane. Bonds have sold off around the globe in recent weeks, pushing UK yields to the highest levels since before the pandemic.
The European Central Bank confronted the shift with a vow to speed up its own asset purchase program. BOE officials gave tacit approval to the increase in yields, declining to intervene in the market in their last decision on monetary
policy on March 18.
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The FPC released details of previous discussions about the implications of a disorderly Brexit for open-ended commercial real estate funds. The group had been briefed that some may have to be suspended, as they were after the 2016 referendum, but opted to keep this out of the record until after the transition in case the comments themselves increased the risk