Central clearing in government bond markets: keeping the "safe asset" safe?

Key takeaways

• Government bond trading is typically over the counter, with dealers playing a key role as intermediaries. Pressure on their intermediation capacity is set to increase as government debt continues to grow.
• Enhancing the volume of centrally cleared transactions could help mitigate risks to market functioning by freeing up the balance sheet of dealers and encouraging all-to-all trading.
• The need for liquidity management will remain. Fixing the "plumbing" alone may have limited impact in a market-wide deleveraging episode with one-sided flows. Hence central clearing of government bonds and repos would not fully eliminate financial market risks but would change their nature.