Benchmark tipping in the global bond market

We analyse the turnover of fixed income derivatives in seven currencies to test the hypothesis that market participants increasingly use contracts based on private rather than government rates to hedge and to take positions. In the US dollar money market, private benchmarks long ago displaced government benchmarks. In the bond markets, evidence from organised exchanges and the Triennial Central Bank survey on over-the-counter (OTC) markets suggests that the benchmark is tipping from government bond futures to private interest rate swaps. The global financial crisis seems only to have interrupted this process in the US dollar bond market, the European sovereign bond strains may have accelerated it in the euro bond market; and the policy to clear centrally OTC trades does not seem to be impeding it. Cross-sectional analysis of 35 bond markets identifies bond market size and GDP per capita as key determinants of the existence of government bond futures. Based on these results, one may expect uccessful introduction of government bond futures in China and Brazil even as such contracts continue to lose ground in today's major markets.

JEL classification: E44, G12, O16

Keywords: Benchmark, safe assets, government bond futures, interest rate swaps, US Treasury bonds, German bunds, Japanese government bonds, UK gilts