that, if anything, liquidity may have improved. 8 however, given the nature of the corporate bond market, these estimates are based on transactions rather than on direct observations of quotes to buy or sell these bonds. what we can directly observe is that trade sizes and turnover have declined in the most actively traded corporate bonds as they have in treasury markets. 9 and although observable measures of overall liquidity in corporate bond markets appear good, there is some evidence that liquidity has deteriorated for the lowest - rated bonds. 10 trading in these less liquid segments may rely heavily on intermediation by dealers, and dealers have scaled back their capital commitments and inventories in corporate bonds since the financial crisis. 11 immediately after the financial crisis, dealers began to move away from a principal model of market making, whereby they would facilitate trades using their own inventories and assume some risk, toward an agency model. many point to post - crisis regulation as a key factor in this process. one area in particular where market participants point to the impact of regulation is treasury repo markets. at the 2015 conference, participants noted that required spreads on treasury repo trades have widened significantly since the crisis and attributed some of this increase to regulation. 12 but post - crisis regulations have also greatly strengthened the major banks and made another financial crisis far less likely. evidence also indicates that certain regulations have increased see tobias adrian, michael fleming, daniel stackman, and erik vogt, has u. s. treasury market liquidity deteriorated?, liberty street economics ( blog ), august 17, 2015. ibid. see for example, terrence hendershott, charles m. jones, and albert j. menkveld, " implementation shortfall with transitory price effects ( pdf ), " in high frequency trading ; new realities for trades, markets and regulators, david easley, marcos lopez de prado, and maureen o'hara ( editors ), risk books ( london : 2013 ). see bruce mizrach, " analysis of corporate bond liquidity ( pdf ), " financial industry regulatory authority ( finra ), office of the chief economist research note, december 2015. ibid see tobias adrian, michael fleming, erik vogt, and zachary wojtowicz, further analysis of corporate bond market liquidity, liberty street economics ( blog ), february 10, 2016. see hendrik bessembinder, stacey e. jacobsen, william f. maxwell, and kumar ve

jerome h powell : trends in fixed - income markets testimony by mr jerome h powell, member of the board of governors of the federal reserve system, before the subcommittee on securities, insurance, and investment, and subcommittee on economic policy, committee on banking, housing, and urban affairs, us senate, washington dc, 14 april 2016. * * * chairmen crapo and heller, ranking members warner and warren, other subcommittee members, i would like to thank you for inviting me to testify today on trends in fixed - income markets. because these markets perform important functions in our economy, it is imperative that we understand the significant changes they are currently undergoing. as i will discuss, a number of factors have been driving these changes. some market participants have expressed concerns about low liquidity across fixed - income markets, although many recent studies have found it difficult to identify such a broad reduction. it may be that liquidity has deteriorated only in certain market segments. it may also be that, even if liquidity is adequate in normal conditions, it has become more fragile, or prone to disappearing under stress. the sharp swing in treasury prices that took place on october 15, 2014, led the federal reserve board, in conjunction with the treasury department, the commodity futures trading commission, the federal reserve bank of new york, and the securities and exchange commission, to create a joint staff report and to host a conference on the structure of treasury markets at the federal reserve bank of new york ( frbny ) in october 2015. 1 the staff of the four agencies and the frbny compiled transactions data across both treasury cash and futures markets and analyzed the factors that could have caused the rapid rise and subsequent reversal in treasury prices in such a short span of time. this analysis did not find a single factor that caused the sharp swing in prices. as had already occurred in equity markets, advances in computing and communications technologies have allowed proprietary trading firms ( ptfs, also often called high - frequency trading firms ) to capture a majority of the interdealer market in treasuries. as a consequence of these changes, trading in treasury markets now moves at extreme speed. it may be that these changes have also led to greater liquidity risk, or sudden declines in liquidity. researchers at the frbny have shown that spikes in volatility and sudden declines in liquidity have become more frequent in both treasury and equity markets. 2 there is also evidence that liquidity shifts more rapidly and hence is less predictable