Fed’s Tarullo: Something’s Changed in The Bond Market; Unclear Why

25-Jun (Wall Street Journal) – Federal Reserve governor Daniel Tarullo said Thursday changing bond-market liquidity conditions remain unaccounted for, with uncertain implications for overall financial stability.

Mr. Tarullo was addressing rising anxiety that changes in financial firms’ regulation, among other factors, is causing some companies to pull back from the bond market, in turn boosting the risk stress-driven volatility could cause harm to the economy as a whole. The official also took stock of the implementation of new rules aimed at strengthening the regulation of the financial sector, and he warned that leaders of financial firms need to be held accountable when their employees violate the law.

Mr. Tarullo made his comments in an appearance at the Council on Foreign Relations in New York. He didn’t comment on monetary policy or the economy.

“There does seem to be something different” in bond markets right now, the official said. “Something does seem to have changed” in terms of things like the ability of a market participant to easily execute a large trade, he said.

As it now stands, “I don’t think there is at this point a very precise and convincing explanation for exactly what has happened,” Mr. Tarullo said. He noted signs of fragility could be tied to regulatory changes, the rise of high frequency trading and firms’ willingness to engage in the market as potential drivers of current market conditions.

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PG View: You don’t suppose removing all the liquidity provided by the Fed last year has anything to do with?