Government bonds are special because they provide liquidity when needed especially in a crisis. They are safe assets because you can buy what you want, when you want, at a price that is close to fair value and will not move when you execute size. Perhaps those days are over.
A look at top of the book liquidity suggests that liquidity is not there. If you want to trade size, you will move the market. Dealers are not present for immediacy. Rates have been so stable for so long that the big liquidity providers may not exist. There are traders in these markets but not sizable dealers.
There may be massive flows as financial institutions decide that monetary policy is changing, and it is time to hedge or rebalance a loan book, yet there are few who may take the other side of these trades for short periods to make a market. Treasury and German bond markets are seeing the same problem as the short-end of the curve. Liquidity is present for longer maturities. The result of a less liquid market will be investor avoidance. Don't play in markets subject to liquidity shortfalls. This will create a new policy problem. Will central bank have to serve as continuous liquidity providers to ensure that government bonds are a safe asset?
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