Press Release No. 15/274

Press Release: Public Debt Management Forum Considers Recent Sovereign Bond Volatility, Deterioration in Market Liquidity and Longer Term Challenges

June 12, 2015

Senior officials from 42 advanced and emerging market economies, and international financial institutions, together with representatives of the private sector and academia met on June 11–12 at the International Monetary Fund (IMF) IMF Headquarters in Washington D.C. to discuss issues relevant for public debt management. The forum allows debt managers, IMF officials and other participants to connect challenges facing debt markets to broader macroeconomic and financial stability developments. The discussions were insightful, thought-provoking, and enriched by the diversity of participants’ experience from advanced and emerging markets.

The forum took place against the background of the uneven global recovery and recent volatility in global bond markets. Participants remarked that secondary market liquidity had deteriorated, adding to sovereign bond market volatility. This is, in part, the result of banks’ evolving business models as they adapt to the post-crisis market and regulatory environment, and the continued take-up of sovereign bonds by central banks. In addition, a prolonged low yield environment poses challenges for a number of financial institutions which are the traditional investors of sovereign bonds.

In his opening remarks, José Viñals, the IMF’s financial counselor and director of the monetary and capital markets department, reflected on the varied and complex issues debt managers face in both advanced and emerging market economies. “The divergence in monetary policies in advanced economies will continue to influence capital markets including sovereign bonds,” he said, pointing to risks around the Fund’s baseline of a smooth normalization of monetary policy. A delayed path could imply a continued accumulation of financial stability risks. Faster-than-expected tightening could trigger rapid decompression of yields, with heightened volatility and global market spillovers.

In his keynote speech, David Lipton, IMF’s first deputy managing director, focused on the challenges for debt mangers of long-term structural issues such as low potential economic growth, high public debt, and demographic trends. “Debt managers can help ensure through their actions that debt remains sustainable,” he said. They play a pivotal role in the two-way communication between the fiscal authorities and markets, in mitigating the potential consequences of high public debt, and in supporting growth by facilitating the private sector’s access to financing. Debt managers also need to consider and plan for potential risks from contingent liabilities, as they are in the front line in terms of meeting the obligations should such risks materialize, Mr. Lipton added.

The forum also reflected on lessons learnt from the crisis, where participants discussed re-accessing the capital markets after a period of hiatus, contingent liabilities from the bank-sovereign nexus, and addressing collective action problems in sovereign debt restructurings.

Peter Breuer, deputy chief of the IMF’s debt and capital market instruments division, concluded the forum by accentuating a common theme—the need for debt managers to remain vigilant against emerging risks in an environment of diverging monetary policies, structural changes, and reduced market liquidity.

The next Forum will take place in 2017. Details will be announced closer to the time.