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The Impact of Government Debt Supply on Bond Market Liquidity: An Empirical Analysis of the Canadian Market

Jeffrey Gao, Jianjian Jin and Jacob Thompson

Staff Working Papers from Bank of Canada

Abstract: This paper finds that Government of Canada benchmark bonds tend to be more illiquid over the subsequent month when there is a large increase in government debt supply. The result is both statistically and economically significant, stronger for the long-term than the short-term sector, and is robust when other macro factors are controlled for. The result is consistent with the interpretation that risk-averse dealers tend to provide less liquidity to the market when facing increased duration risks brought by large debt issuance. The fact that the newly issued bonds are much less liquid may also contribute to the impact of debt supply on market liquidity.

Keywords: Asset Pricing; Debt Management; Financial markets (search for similar items in EconPapers)
JEL-codes: D53 G G1 G12 G18 G2 G32 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2018
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Handle: RePEc:bca:bocawp:18-35