(Bank of Japan Review) Trends in Government Bond Market Making by Securities Firms
Overview
Securities firms intermediate investors’ trading needs in Japan’s government bond market and earn revenue while managing interest rate risk. This article reviews trends in factors they monitor internally when making markets and discusses their effects on government bond market liquidity, including case studies. Risk management factors generally have little effect on liquidity under normal conditions, but during the sharp market fluctuations in April 2025, greater caution about taking on additional risk may have contributed to wider bid-ask spreads. The article emphasizes the importance of continuing to deepen understanding of developments in this business.
Key points
- Securities firms intermediate trading needs for government bonds, manage interest rate risk, and earn income from intermediation.
- The effects are small under normal conditions, but may affect liquidity during sharp market fluctuations.
- The article emphasizes the importance of continuing to deepen understanding of developments in the market-making business.
Overview
This article reviews trends in the factors securities firms monitor internally when performing their market-making function and discusses their effects on government bond market liquidity, including case studies.
In Japan’s government bond market, securities firms intermediate investors’ trading needs and earn revenue from intermediation while managing the interest rate risk they bear.
Impact
In general, when market conditions are calm, securities firms’ risk management factors have little effect on government bond market liquidity.
During the sharp market fluctuations in April 2025, greater caution among securities firms about taking on additional risk may have contributed to wider bid-ask spreads.
Details
The internal factors reviewed are balance sheet size, interest rate risk exposure, and earnings.
The Bank of Japan Review series is edited and published by the Bank of Japan to explain recent financial and economic topics clearly and concisely to a broad readership interested in finance and the economy. The views expressed in the reports are those of the authors and do not necessarily represent the views of the Bank of Japan. Questions about the content may be directed to the Financial System and Bank Examination Department, Financial System Research Division III, Bank of Japan (main switchboard: 03-3279-1111).