Others might argue that liquidity on October 15 was reasonable, because the ability to transact, albeit in smaller than usual sizes, appears to have been there, even in the most volatile times. As previously noted, trading volumes were many times their normal levels during that morning, and trading took place on a continuous basis. If liquidity had really deteriorated so significantly, it may be unlikely that such extraordinary flows would have been possible. That being said, the simple ability to transact does not necessarily equate to strong liquidity, particularly if transacting is only realistic in a relatively small size, or if it is only possible to conduct a trade of reasonable size by “paying” a significant spread to the midpoint of the best bid and offer. Regardless of one’s definition of liquidity, recurring periods of heightened and unexplained volatility – especially if prompted by little new information, as with the event window on October 15 – could prompt end-investors and market makers to question the superior liquidity of the Treasury market and perhaps hamper the critical roles the market serves. The Treasury market serves as a liquid investment option for global investors, a ready source of collateral for other financial transactions, a benchmark for pricing other securities, an important component of the Federal Reserve’s framework for implementing monetary policy, and a market for financing the government that determines borrowing costs to the taxpayer.

The Bank of England said it would complete its asset purchases ‘as soon as is operationally possible, consistent with improved market functioning’.18 The Federal Reserve said it would ‘purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning’.19 And the ECB framed its decisions in the context of ‘severe strains in the financial markets’ posing risks ‘of the ECB’s monetary policy transmission becoming significantly impaired’.20 Asset purchases have accounted for all of the net increase in Bank of England and Federal Reserve balance sheets since last Spring, and about half of the ECB’s. Many other central banks took similar actions.21  16  The Bank of England expanded its own lending facilities to include broker dealers and CCPs in 2014, in response to the recommendation of the Winters Review: https://www.bankofengland.co.uk/news/2014/november/widening-access-to-the-smf. 17 Lorie Logan of the New York Federal Reserve, for example, set out the US approach in a speech last October: https://www.newyorkfed.org/newsevents/speeches/2020/log201023 18 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2020/monetary-policy-summary-for-the-special-monetarypolicy-committee-meeting-on-19-march-2020 19 https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm 20 https://www.ecb.europa.eu/press/accounts/2020/html/ecb.mg200409_1~baf4b2ad06.en.html 21 See for example ‘Central bank bond purchases in emerging market economies’ by Yavuz Arslan, Mathias Drehmann and Boris Hofmann, BIS Bulletin no.20 at: https://www.bis.org/publ/bisbull20.pdf. 8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  Chart 4: Central bank balance sheet responses to the Covid-19 shock during 2020 Changes in components of central bank balance sheets since end-Feb 2020 (as % of 2019 nominal GDP)  Sources: Bank of England, Bureau of Economic Analysis, European Central Bank, Eurostat, Federal Reserve Board, ONS and Bank calculations.