BIS: Leverage and margin spirals in fixed income markets during the Covid-19 crisis

Key takeaways

  • For a two-week period in mid-March 2020, government bond markets experienced uncharacteristic turbulence, sometimes selling off sharply in risk-off episodes when they would normally attract safe haven flows.
  • Evidence in the US Treasury market points to forced selling of treasury securities by investors who had attempted to exploit small yield differences through the use of leverage.
  • Even though government bonds are safe assets, large holdings by leveraged investors may detract from orderly market functioning and may necessitate interventions by the central bank.

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