How foreign central banks can affect liquidity in the Government of Canada bond market

Patrick Aldridge, Jabir Sandhu and Sofia Tchamova

No 2024-26, Staff Analytical Notes from Bank of Canada

Abstract: We find that foreign central banks own a large share of Government of Canada (GoC) bonds and tend to hold their positions for longer than other types of asset managers. This buy-and-hold behaviour could offer benefits. For example, foreign central banks may be less likely than other asset managers to sell bonds and add to strains on market liquidity in periods of turmoil. However, foreign central banks’ buy-and-hold behaviour combined with their minimal lending of GoC bonds in securities-financing markets, as observed in our available data, can potentially lower liquidity because fewer GoC bonds are available for others to transact in secondary markets. Indeed, we find that higher levels of foreign central banks’ GoC bond holdings are related to lower liquidity.

Keywords: Exchange rates; Financial institutions; Financial markets, Financial stability; Foreign reserves management; International financial markets; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: E5 E58 F3 F30 F31 G0 G01 G1 G11 G12 G15 G2 G23 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsan:24-26

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