1. Asset Valuations

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Purpose and Framework Overview 1. Asset Valuations 2. Borrowing by Businesses and Households 3. Leverage in the Financial Sector 4. Funding Risks 5. Near-Term Risks to the Financial System

1. Asset Valuations

Asset valuation pressures remained moderate despite notable fluctuations in financial markets

Since the November report, significant strains in the banking sector, along with increased uncertainty about the economic outlook and the path of monetary policy, led to notable fluctuations in financial asset prices. Yields on Treasury securities declined across all maturities. Broad equity indexes were volatile but have increased, on net, since the previous report. Corporate credit spreads were moderately lower, on net, and near their historical averages.

Liquidity in short-term Treasury markets experienced notable strains associated with the high volatility and elevated uncertainty that roiled financial markets in the middle of March, while equity and corporate bond markets also saw liquidity deteriorate during that period. Despite these worsened liquidity conditions, market functioning proved largely resilient.

As has been the case for some time now, valuation pressures remained elevated in property markets. In residential real estate, valuations remained near all-time highs despite weakening activity and falling prices in recent months. Valuations in the commercial segment also remained near historical highs even though price declines have been widespread. In addition, fundamentals have weakened, particularly for the office segment. Farmland prices were also historically elevated relative to rents, reflecting higher crop prices and limited inventories of land.

Table 1.1 shows the sizes of the asset markets discussed in this section. The largest asset markets are those for residential real estate, equities, Treasury securities, and CRE.

Table 1.1. Size of selected asset markets

Item	Outstanding (billions of dollars)	Growth, 2021:Q4–2022:Q4 (percent)	Average annual growth, 1997–2022:Q4 (percent)
Residential real estate	55,670	10.4	6.4
Equities	46,819	−21.0	8.7
Treasury securities	23,845	5.7	8.1
Commercial real estate	23,796	−1.4	6.8
Investment-grade corporate bonds	7,116	4.8	8.1
Farmland	3,188	10.1	5.7
High-yield and unrated corporate bonds	1,677	−6.6	6.6
Leveraged loans *	1,424	6.2	13.9

Price growth (real)
Commercial real estate **		−1.9	3.1
Residential real estate ***		.3	2.5

Note: The data extend through 2022:Q4. Growth rates are measured from Q4 of the year immediately preceding the period through Q4 of the final year of the period. Equities, real estate, and farmland are at nominal market value; bonds and loans are at nominal book value.

* The amount outstanding shows institutional leveraged loans and generally excludes loan commitments held by banks. For example, lines of credit are generally excluded from this measure. Average annual growth of leveraged loans is from 2000 to 2022:Q4, as this market was fairly small before then.

** One-year growth of commercial real estate prices is from December 2021 to December 2022, and average annual growth is from 1998:Q4 to 2022:Q4. Both growth rates are calculated from equal-weighted nominal prices deflated using the consumer price index (CPI).

*** One-year growth of residential real estate prices is from December 2021 to December 2022, and average annual growth is from 1997:Q4 to 2022:Q4. Nominal prices are deflated using the CPI.

Source: For leveraged loans, PitchBook Data, Leveraged Commentary & Data; for corporate bonds, Mergent, Inc., Fixed Income Securities Database; for farmland, Department of Agriculture; for residential real estate price growth, CoreLogic, Inc.; for commercial real estate price growth, CoStar Group, Inc., CoStar Commercial Repeat Sale Indices; for all other items, Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States."

Treasury yields declined sharply following the Silicon Valley Bank and Signature Bank failures, particularly for shorter-maturity securities

On net, yields on Treasury securities moved lower since the November report (figure 1.1). However, the monthly averages plotted in the figure obscure some important daily movements during the month of March. Throughout February and into early March, the yields on Treasury securities moved notably higher following stronger-than-expected economic data but abruptly reversed course following the failures of SVB and Signature Bank. These failures raised uncertainty about the economic outlook and future path of interest rates, prompting investors to reallocate portfolios toward safer assets. The market for two-year Treasury securities was most acutely affected, with the two-year yield falling by more than 60 basis points on March 13, the single largest daily decline since 1987. Yields on longer-term Treasury securities also declined in March, but by a smaller amount.

Figure 1.1. Nominal Treasury yields fell in March and April

A model-based estimate of the nominal Treasury term premium—a measure of the compensation that investors require to hold longer-term Treasury securities rather than shorter-term ones—remained low relative to its long-run history (figure 1.2). Treasury market volumes, particularly in the on-the-run segment, increased dramatically in March as well. Interest rate volatility implied by options remained well above its historical median (figure 1.3).

Figure 1.2. An estimate of the nominal Treasury term premium
remained low

Figure 1.3. Interest rate volatility remained above its long-term
median

Equity market valuation pressures increased modestly

Equity prices in the banking sector fell following the SVB and Signature Bank failures to levels well below those that prevailed at the time of the November report. Broad equity indexes experienced considerable volatility but, smoothing through the ups and downs, were up a bit from the previous report. All told, equity market valuation pressures increased modestly since the November report as equity price growth outpaced growth in earnings forecasts, pushing the forward price-to-earnings ratio higher to a level notably above its historical average (figure 1.4).

Figure 1.4. The price-to-earnings ratio of S&P 500 firms
continued to be above its historical median

An estimate of the expected equity premium—one measure of the additional return that investors require for holding stocks relative to risk-free bonds—declined since the November report to somewhat below its historical median (figure 1.5).² Equity market volatility remained elevated during the first quarter of 2023, reflecting strains in the banking system and continued uncertainty around monetary policy and future economic conditions, but fell to near its historical median in April (figure 1.6).

Figure 1.5. An estimate of the equity premium fell below its
historical median

Figure 1.6. Volatility in equity markets remained elevated

Market liquidity worsened in key markets amid heightened uncertainty

Market liquidity refers to the ease and cost of buying and selling an asset. Low liquidity can amplify the volatility of asset prices and result in larger price moves in response to shocks. In extreme cases, low liquidity can threaten market functioning, leading to a situation in which participants are unable to trade without incurring a significant cost.

Liquidity conditions in the market for Treasury securities are particularly important due to the key role those securities play in the financial system. Throughout much of last year and into early 2023, various measures of liquidity—the average size of bid and ask orders posted on electronic platforms at the best prices ("market depth") and bid-ask spreads—indicated that liquidity in the Treasury market was lower and less resilient than is typical.³ Market liquidity conditions came under even greater strain as a result of distress in the banking sector. Market depth in on-the-run Treasury securities, normally the most liquid segment, fell substantially in mid-March (figures 1.7 and 1.8), and bid-ask spreads rose marketwide, with particularly notable increases for shorter-maturity notes. Further, the intraday volatility of bid-ask spreads on short-maturity securities rose to levels last seen in March 2020.⁴ These additional liquidity strains in March 2023 appeared to be a consequence of the elevated interest rate volatility that followed the heightened uncertainty around the future economic outlook and path of monetary policy. Despite these strains, Treasury markets continued to function throughout the episode without severe dislocations or reports of investors being unable to transact. By early April, the most acute strains had dissipated, and liquidity conditions in Treasury markets returned to the levels that prevailed for much of the past year.

Figure 1.7. Treasury market depth remained below historical norms

Figure 1.8. On-the-run market depth worsened in March then recovered

Liquidity deteriorated in a range of other markets in March as well. Bid-ask spreads on corporate bonds widened, particularly for investment-grade financial bonds, although these spreads remained well below pandemic levels. In equity markets, depth in the S&P 500 futures markets declined before stabilizing at below-average levels (figure 1.9). Equity and corporate bond market functioning remained largely smooth despite the rising transaction costs associated with lower liquidity, and liquidity conditions normalized by early April.

Figure 1.9. A measure of liquidity in equity markets fell sharply
in March

Corporate debt market valuations remained near their historical averages

Yields on corporate bonds fell since the November report and by more than yields on comparable-maturity Treasury securities (figure 1.10). Consequently, corporate bond spreads, measured as the difference in yields between corporate bonds and comparable-maturity Treasury securities, were moderately lower since November and near their historical average levels (figure 1.11). The excess bond premium—a measure that captures the gap between corporate bond spreads and expected credit losses—has remained near its historical average (figure 1.12).

Figure 1.10. Corporate bond yields fell to near their historical
averages

Figure 1.11. Spreads to similar-maturity Treasury securities
edged down

Figure 1.12. The excess bond premium stayed near its historical
average

Valuation pressures in leveraged loan markets were little changed from the November report. The average spread on leveraged loans above their benchmark rates in the secondary market declined moderately and was near its average over the past decade (figure 1.13). The excess loan premium, a measure of the risk premium in leveraged loans, increased notably during March and remained at an elevated level, indicating subdued investor risk appetite. The trailing 12-month loan default rate increased moderately but remained somewhat below its historical median, while the year-ahead expected default rate rose moderately, suggesting a mild deterioration of the credit quality of leveraged loan borrowers and a worsening outlook.

Figure 1.13. Spreads in the leveraged loan market fell modestly

The transition away from LIBOR as the benchmark rate in the leveraged loan market was nearly complete, with almost all new leveraged loan activity being conducted using the Secured Overnight Financing Rate (SOFR) (see the box "Update on the Transition to the Secured Overnight Financing Rate").

Box 1.1. Update on the Transition to the Secured Overnight Financing Rate

The banks contributing to the U.S. dollar (USD) LIBOR rates are due to end their submissions after June 30, 2023, marking the end of LIBOR as a representative benchmark. The transitions from the euro, Swiss franc, Japanese yen, and sterling LIBOR rates, which ended last year, went smoothly, but the transition from USD LIBOR poses particular risks because of the very large exposures to these rates both domestically and abroad. The Alternative Reference Rates Committee (ARRC) has estimated that USD LIBOR is used in $74 trillion of financial contracts maturing after June 2023, and it is also used extensively in nonfinancial contracts.

New activity

Following guidance issued by the Federal Reserve, FDIC, and Office of the Comptroller of the Currency warning that most new use of USD LIBOR in contracts after 2021 would create safety and soundness risks, almost all new transactions have moved to SOFR. Adjustable-rate retail mortgage originations and almost all floating-rate debt issuance are now based on SOFR, and SOFR represents more than 90 percent of risk traded in new derivatives activity. Although SOFR just began publication in 2018, there are now more than $60 trillion of SOFR derivatives and $4 trillion in SOFR loans and debt instruments outstanding.

While most new derivatives, floating-rate debt, and consumer products reference SOFR or averages of SOFR directly, the bulk of new lending activity has moved to term SOFR rates. The term SOFR rates are forward-looking benchmarks with 1-, 3-, 6- , and 12-month maturities similar to LIBOR. They are derivatives products based on futures markets for SOFR rather than drawing directly from transactions in the Treasury repurchase agreement (repo) market that overnight SOFR is based on and, thus, depend on the continued high level of transaction depth in overnight SOFR futures and other derivatives markets in order to be robustly produced.

Recently, CME Group, the administrator of the term SOFR rates, has moved to explicitly incorporate limits on the use of its rates that mirror the ARRC's recommendations in its licensing agreements, which should help ensure that use of these rates remains in line with financial stability considerations. The FSOC and Financial Stability Board have both recognized the use of these types of term rates in legacy LIBOR cash products and some business loans but have warned against more widespread use. In line with these recommendations, the ARRC has recognized the use of term SOFR rates as a fallback in legacy cash products and certain new issuances of cash products, particularly business loans, but has recommended that use of term SOFR rates in derivatives and most other cash markets remain limited.

Legacy products

In December, the Board issued its final rule implementing the Adjustable Interest Rate (LIBOR) Act (LIBOR Act). The LIBOR Act directed the Board to select spread-adjusted benchmark replacements based on SOFR for LIBOR contracts that mature after June 30, 2023, and do not have clear and practicable fallback language. While the International Swaps and Derivatives Association and the ARRC have worked over the past several years to develop and encourage the use of fallback language that adequately addresses the impending cessation of LIBOR, many older contracts only have fallbacks appropriate for a temporary outage of LIBOR rather than its permanent cessation, and some contracts do not have any fallbacks at all. This is a particular problem for legacy floating-rate debt, securitizations, and consumer products, all of which are difficult to amend. The Board's final rule will replace (or allow for the replacement of) LIBOR in these products with spread-adjusted versions of CME Group's term SOFR rates or averages of SOFR following June 30, 2023.

While the banks submitting to the remaining USD LIBOR rate panel will withdraw as of June 30, 2023, the U.K. Financial Conduct Authority (FCA) has announced that it will require the administrator of LIBOR to continue publishing 1-, 3-, and 6-month USD LIBOR on a "synthetic" basis for an additional 15 months, through September 2024. The FCA has stated that these synthetic LIBOR rates will be nonrepresentative, meaning that, in the FCA's official judgement, they will not reflect the underlying market that LIBOR was intended to represent. The FCA has also stated that it intends the publication of these synthetic rates to help the transition of legacy contracts not subject to U.S. law and therefore not covered by the LIBOR Act. The synthetic version of USD LIBOR will be published as LIBOR but would match the spread-adjusted term SOFR rates that the Board has selected under the LIBOR Act as the benchmark replacement rate applicable to most nonconsumer cash products. Most contracts under U.S. law will not be affected by the publication of these synthetic rates either because they have more recent fallback language designed to move away from LIBOR once it is declared to be nonrepresentative or because they are covered by the LIBOR Act. Nonetheless, there are some contracts issued under U.S. law that would fall back to a non-LIBOR rate (and so are not covered by the LIBOR Act) that may reference the synthetic LIBOR rates, primarily older loan agreements that otherwise would fall back to the prime rate (which is much higher than LIBOR) if LIBOR is unavailable.

LCH and CME Group are implementing plans to convert outstanding LIBOR derivatives that they clear to SOFR over April and May 2023. The Board has encouraged banks to similarly remediate their LIBOR loans ahead of June 30, 2023, where feasible, citing operational risks that could arise from attempting to convert a large book of LIBOR loans in a short period of time following June 2023. While firms have set deadlines to complete the remediation of their outstanding LIBOR loans ahead of June 30, 2023, there are risks that they will fall behind schedule. Progress in remediating syndicated leveraged loans, which can require consent or nonobjection from a majority of the lenders—in many cases including nonbank financial institutions (NBFIs)—has been particularly slow, although there have been recent signs that the pace of remediation may be increasing. Many firms had planned to use refinancing as an opportunity to move these loans off of LIBOR, but refinancing activity has declined over the past year. Securities cannot easily be remediated ahead of the June 30, 2023, deadline, but the ARRC and FSOC have encouraged issuers and other relevant parties to use the Depository Trust and Clearing Corporation's LIBOR Replacement Index Communication Tool in order to inform investors about the rate changes that will take effect after June 2023.

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Commercial real estate prices declined, but valuations remained high

Valuation pressures in the CRE sector have eased slightly since the November report but remained at high levels. Aggregate CRE prices measured in inflation-adjusted terms have declined (figure 1.14). These prices are based on repeat sales and may mask growing weaknesses, as more distressed properties are generally less likely to trade. Capitalization rates at the time of property purchase, which measure the annual income of commercial properties relative to their prices, have turned up modestly from their historically low levels (figure 1.15). While price declines were widespread across all property types, fundamentals in the office sector were particularly weak for offices in central business districts, with vacancy rates increasing further and rent growth declining since the November report. In the January 2023 Senior Loan Officer Opinion Survey (SLOOS), banks reported weaker demand and tighter standards for all CRE loan categories over the fourth quarter of 2022 (figure 1.16). The box "Financial Institutions' Exposure to Commercial Real Estate Debt" offers more detail on where losses might arise in the event of a significant correction in CRE prices.

Figure 1.14. Commercial real estate prices, adjusted for inflation,
declined

Figure 1.15. Income of commercial properties relative to prices
turned up but remained near historically low levels

Figure 1.16. Banks reported tightening lending standards in commercial
real estate loans

Box 1.2. Financial Institutions' Exposure to Commercial Real Estate Debt

The shift toward telework in many industries has dramatically reduced demand for office space, which could lead to a correction in the values of office buildings and downtown retail properties that largely depend on office workers. Moreover, the rise in interest rates over the past year increases the risk that CRE mortgage borrowers will not be able to refinance their loans when the loans reach the end of their term. With CRE valuations remaining elevated (see Section 1, Asset Valuations), the magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE debt.¹ This discussion presents data on the exposures of various financial institutions to CRE mortgage debt, focusing on nonfarm nonresidential properties (a diverse category that includes office buildings, hotels, retail stores, and warehouses) and the construction and land development loans associated with these property types.²

Table A shows the dollar volume of nonfarm nonresidential CRE loans outstanding held by different categories of financial institutions. Banks hold about 60 percent of these CRE loans, of which more than two-thirds are held by banks other than Category I–IV banks.³ Insurance companies and holders of commercial mortgage-backed securities (CMBS) also have significant exposures to CRE mortgages. Insurance companies hold higher-rated tranches of CMBS and shares of equity real estate investment trusts (REITs) that own CRE properties, so the exposure of insurance companies to CRE is larger than their exposure through whole loans shown in the table. Institutions that hold lower-rated tranches of CMBS include private equity funds, mortgage REITs, and finance companies. Mortgages specifically backed by office or downtown retail property tend to be about one-third of each set of institutions' CRE holdings, on average. That said, individual institutions can specialize in certain types of loans, so the portfolio composition of any given institution may differ from the average shown for its category. Loans for construction or land development of nonfarm nonresidential properties (included in column 1 but not shown separately) are about 15 percent of aggregate bank nonfarm nonresidential CRE holdings.

Table A. Commercial real estate holdings in 2022:Q4: Nonfarm nonresidential, including office and downtown retail, by investor type

Investor type	Holdings of nonfarm nonresidential CRE (trillions of dollars)	Percent of total CRE loans outstanding	Holdings of office and downtown retail CRE (trillions of dollars)	Total assets held by each investor type (trillions of dollars)
Total	3.57
Banks	2.17	61	.72	28.5
Category I banks (U.S. G-SIBs)	.28	8	.10	14.3
Category II–IV banks	.34	9	.11	6.8
Other	1.55	43	.51	7.4
Life insurers	.47	13	.17	5.4
Holders of non-agency CMBS	.53	15	.17
Other nonbank	.40	11

Note: Total nonfarm nonresidential commercial real estate (CRE) is all commercial mortgage assets as reported in Table L.220: Commercial Mortgages in the "Financial Accounts of the United States." For banks, the data are private depository institutions' CRE loans. For life insurers, the data are life insurers' CRE loans. Life insurer total assets do not consider reinsurance. For holders of non-agency commercial mortgage-backed securities (CMBS), the data include real estate investment trust (REIT) holdings of CMBS. For other nonbank holders of CRE mortgages, the data are computed as total commercial mortgages less banks, life insurers, and holders of CMBS. This category includes REITs, government, and nonfinancial businesses, among other sectors. Category I U.S. G-SIBs are global systemically important bank holding companies. Totals for banks are constructed as the sum of loans secured by nonfarm nonresidential properties and a fraction (0.847) of non–one- to four-family construction lending. This fraction reflects the estimated fraction of non–one- to four-family construction lending that is not multifamily. A list of banks in each category is available on the Board's website at https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rulevisual-20191010.pdf. The office loan holdings for the groups adjust the groups' CRE holdings by staff estimates for the office loan holdings as a share of nonfarm nonresidential CRE loans in the group. Other banks' CRE lending is constructed by subtracting Category I U.S. G-SIBs' and Category II–IV banks' CRE lending from the bank total. Total assets for these banks are calculated using data from the FR Y-9C and Call Reports. The office and downtown retail share for other banks is assumed to be consistent with the average loan-balance weighted share of Category II–IV banks. Holder percentages may not sum due to rounding.

Source: Federal Reserve Board staff calculations based on the following: Federal Reserve Board, Form FR Y-14Q (Schedule H.2), Capital Assessments and Stress Testing; Morningstar, Inc., Morningstar CMBS data; National Association of Insurance Commissioners, Schedule B; CBRE Econometric Advisors; Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States"; Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies; S&P Global, Capital IQ Pro; and Federal Financial Institutions Examination Council, Call Report Forms FFIEC 031, FFIEC 041, and FFIEC 051, Consolidated Reports of Condition and Income (Call Reports).

Losses on CRE loans will depend on their leverage because owners of buildings with substantial equity cushions are less likely to default. Also, loans with high loan-to-value (LTV) ratios are typically harder to refinance or modify. As of the fourth quarter of 2022, current LTVs (that is, ratios that incorporate recent estimates of building value rather than building value at loan origination) of mortgages backed by office and downtown retail properties were in the range of 50 to 60 percent, on average, for the loan-level data that are available (Category I–IV banks, insurance companies, and CMBS pools). Current LTVs were in a similar range for the broader category of nonfarm nonresidential CRE mortgages. LTVs were low for many mortgages because for most property types—retail being a notable exception—values rose materially in the years leading up to the pandemic. Even so, some CRE mortgages do have fairly high LTVs, in particular at some Category I–IV banks. Two important caveats are worth emphasizing. First, information on the LTVs of CRE mortgages held by banks other than Category I–IV banks is limited. Second, CRE property valuations are elevated, and current LTVs could rise considerably if CRE property valuations were to fall.

The ability of an institution to withstand CRE-related credit losses also depends critically on the fraction of loans to this sector relative to the institution's overall portfolio. Nonfarm nonresidential CRE mortgages tend to be a small share of total assets held by banks overall, but about one-fifth of total assets of banks other than Category I–IV banks. Importantly, some banks may have more concentrated exposures to CRE mortgages than average and therefore may experience higher-than-average losses should CRE conditions weaken. In response to concerns about CRE, the Federal Reserve has increased monitoring of the performance of CRE loans and expanded examination procedures for banks with significant CRE concentration risk.

1. For example, Gupta, Mittal, and Van Nieuwerburgh (2022) estimate that the shift to remote work will lead to a drop in commercial office property values of nearly 40 percent; see Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh (2022), "Work from Home and the Office Real Estate Apocalypse," NBER Working Paper Series 30526 (Cambridge, Mass.: National Bureau of Economic Research, September), https://www.nber.org/papers/w30526. Return to text

2. Specifically, this analysis does not include multifamily mortgages (for example, mortgages backed by apartment buildings) because the fundamentals of that sector are substantially different. In addition, although financial institutions are also exposed to a potential CRE market correction if they hold CRE properties directly, that channel is outside the scope of this discussion. Return to text

3. Category I banks are U.S. G-SIBs. Category II–IV banks tend to have assets greater than $100 billion and are defined according to the tailoring rule of 2019 as listed on page 2 of a visualization of the rule on the Board's website at https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-visual-20191010.pdf. Other banks include remaining depository institutions. Return to text

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Farmland valuations remained at high levels

Farmland prices were near the peak values of their historical distribution, remaining unchanged since the November report (figure 1.17). Similarly, the ratios of farmland prices to rents remained historically high (figure 1.18). These high valuations were driven by strong agricultural commodity prices, limited inventory of farmland, and significant increases in cropland revenues that had more than offset higher operating costs.

Figure 1.17. Farmland prices reached near historical highs

Figure 1.18. Farmland prices grew faster than rents

House prices declined in recent months, but valuations remained high

Rising borrowing costs have contributed to a moderation of prices in housing markets, as year-over-year house price increases have decelerated (figure 1.19), and some data suggested small declines in recent months. Nevertheless, valuation pressures in residential real estate remain elevated. A model of house price valuation based on prices relative to owners' equivalent rent and the real 10-year Treasury yield remained near historically high levels despite having fallen somewhat in the first quarter. Another measure based on market rents also pointed to stretched valuations, although to a lesser extent (figure 1.20). Similarly, while price-to-rent ratios have declined across a wide distribution of geographic areas since the November report, the median price-to-rent ratio remained above its previous peak in the mid-2000s (figure 1.21). While housing fundamentals have weakened, foreclosures and distressed sales, which could amplify downward pressure on prices, remained limited because mortgage underwriting standards did not loosen substantially as they did in the early 2000s. In addition, homeowner equity cushions remained considerable, and the share of second-home buyers also remained near historical lows.

Figure 1.19. House price growth decelerated sharply

Figure 1.20. Model-based measures of house price valuations remained
historically high

Figure 1.21. House price-to-rent ratios remained elevated across
geographic areas

References

2. This estimate is constructed based on expected corporate earnings for 12 months ahead. Alternative measures of the equity premium that incorporate longer-term earnings forecasts suggest more elevated equity valuation pressures. Return to text

3. The bid-ask spread is the difference between the best "bid" quote to buy an asset and the best "ask" quote to sell that asset; smaller bid-ask spreads indicate lower trading costs and, hence, more liquid markets. Return to text

4. For further discussions about the liquidity risks posed by volatile bid-ask spreads, see Dobrislav Dobrev and Andrew Meldrum (2020), "What Do Quoted Spreads Tell Us about Machine Trading at Times of Market Stress? Evidence from Treasury and FX Markets during the COVID-19-Related Market Turmoil in March 2020," FEDS Notes (Washington: Board of Governors of the Federal Reserve System, September 25), https://doi.org/10.17016/2380-7172.2748. Return to text

Last Update: May 15, 2023

Financial Stability Report - May 2023