LONDON, June 17 (Reuters) – Global regulators will review the structure of bond markets to see if any changes are needed as central bankers fret over the possibility of more "taper tantrums" once interest rates start to rise.
The International Organization of Securities Commissions (IOSCO), which groups market watchdogs from more than 100 countries, said its review would look at liquidity in the sector.
"We know that significant structural changes have occurred in the bond market," IOSCO Chairman Greg Medcraft told a news conference on the sidelines of the body’s annual conference.
"A lot of people are looking at this. Why? It’s a pretty difficult and complex issue," IOSCO Secretary General David Wright said.
"This work has taken on a degree of priority because of the importance of understanding these markets and the effects."
The bond market has been buoyed by central banks buying up debt to inject money into a sluggish economy.
As economies recover, central banks like the Federal Reserve are looking to raise rates but hints of this have already sent bonds into bouts of extreme volatility or "taper tantrums."
"When the water goes out, what is this thing going to look like?" I think a healthy skeptical review of liquidity is important," Medcraft said.
Banks have blamed higher capital charges on holding bonds on their books for making markets in the asset. Many have pulled out of market making, raising concerns that there will not be the capacity to deal smoothly with any big selloff.
European Central Bank governing council member Christian Noyer said on Tuesday that increased financial regulation had spurred a retreat from market making.
But regulators say steps to avert volatility could simply create unintended problems elsewhere in markets.
Markets have always been about investors taking risks, Medcraft said. "Markets go up and down."