For some time we had been commenting that the narrow yield spreads on risky assets was raising questions about whether risk was being priced appropriately, a concern shared by other central bankers. Signs of difficulty within global financial markets have been evident in the market for assetbacked commercial paper (ABCP) and in the drying up of liquidity in money markets more generally.
Yields on short-term government debt fell sharply as investors tried to shift into risk-free assets, and demands for liquidity put upward pressure on overnight interest rates. Most major central banks responded by providing liquidity to support the functioning of markets, conducting operations to reduce the upward pressure on overnight interest rates. The Bank of Canada undertook normal open market buyback operations to provide liquidity.