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Financial markets

Bond Market Volatility Forces Dealers to Rethink Capital Reserves

Strategic Insights

— 1 min read

Rising interest rates and sharp price fluctuations have created the most volatile bond markets in at least a decade, prompting investment dealers to reconsider their capital reserves for bond trading. The Investment Dealers Association has warned its members that they might have to increase the amount of capital on hand by 50% for bonds, which could affect individual investors buying fixed-income securities. This move aims to cushion investment dealers' risk in holding bonds due to increased volatility and risk in the market.

Key Takeaways:

  • The Investment Dealers Association has warned its members that they might have to increase the amount of capital on hand by 50% for bonds due to increased volatility and risk in the market.
  • The proposed capital reserve increase could be as high as $500-million, affecting individual investors buying fixed-income securities.
  • Dealers are moving out of bonds and hedging their positions on the options and futures markets due to sharp price fluctuations.
  • The industry is well capitalized, with $1.6-billion of excess capital at the end of January.
  • Some smaller brokerage firms may be forced to liquidate their bond positions, causing further volatility in the market.

Statistics:

  • 50% increase in capital reserves for bonds proposed by the Investment Dealers Association.
  • Potential capital reserve increase: $500-million.
  • Government of Canada bonds maturing in less than three years require a 1% capital deposit.
  • Long-term corporate bonds require a 10% capital deposit.
  • On long-term Canada bonds, a firm must have on hand $40 for every $1,000 bond.
  • The proposed capital reserve increase would bring the amount to $60.
  • $1.6-billion of excess capital in the industry at the end of January.
  • Easter Monday's four-point loss was the biggest daily bond market move since just after the October 1987 stock market crash.

Sources:

1. The Globe and Mail, Dennis Slocum, "Rising interest rates have produced the most volatile bond markets in at least a decade..."

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