If the fixed-income market is to perform its important function, more is needed than participants who set prices for the various assets. There must also be participants who trade actively at those prices. Neither must the counterparty risks be perceived as unduly high because that may deter participants from trading. Moreover, the market must be capable of handling large volumes without this by itself having an appreciable effect on prices. In other words, the market should be adequately liquid. Why is liquidity important for monetary policy? The answer is that in a liquid market, relevant news shows up quickly in interest rates. An adjustment of the Riksbank’s repo rate, for example, has a rapid pass-through to the short market rates, as well as to somewhat longer rates. This applies, of course, in so far as the repo rate adjustment takes the market by surprise. If market participants instead understand how the Riksbank interprets new information in the form of macroeconomic outcomes, they can draw conclusions about the Riksbank’s future actions. News is then reflected in the formation of interest rates at the time when the macroeconomic outcomes are known. The relevant interest rates also react quickly to various forms of information from the Riksbank. Somewhat longer interest rates may be affected, for instance, when we publish a repo rate forecast, a so-called interest-rate path that presents the Riksbank’s assessment of the future development of the policy rate. The conditions for good market liquidity include low transaction costs, management of counterparty risks and market transparency.

Turning now to market transparency, what is the situation in Sweden? MiFID entails the introduction of rules for transparency before and after share trading. The requirement applies to all trading facilities and involves the publication of prices and volumes. So for shares there are no deficiencies concerning transparency in these respects. There may, however, be shortcomings in over-the-counter trading in interest-bearing securities and derivatives. A large proportion of fixed-income trading in Sweden is done by telephone rather than on a market. Derivative instruments can also be traded off-market. 8 If trading is arranged instead with an electronic facility, each order is matched against the best price and market access can be improved for new players. Still, there may be financial markets whose functioning is not improved by increased transparency. It should therefore be up to each market, including the Swedish fixed-income market, to decide which approach is most effective. What are the lessons from this argument? Well, in times like these, coloured by financial market uncertainty, there is much less propensity to take risks. Financial market participants are more interested in low-risk assets, low-risk markets and counterparties that they know and are safe. In a severe situation, this can mean that in certain cases trading ceases altogether because even small risks are perceived as too large. This is because the problems associated with counterparty risks and a lack of transparency become more tangible when markets are turbulent. Every measure by which the financial markets can be made to function even in turbulent times is welcome.