The Reserve Bank of Australia has poured cold water on the idea "that central banks step in and play the role of market-maker of last resort" in the bond market.In a speech yesterday in which he considered aspects of liquidity in the bond market, Guy Debelle, assistant governor for financial markets, said: "It is worth pointing out that the term 'market-maker of last resort' is misrepresenting the role being played."A market-maker makes two-way prices, both buying and selling. "In a dislocated market, with most of the trading one-way, the central bank would only be buying, it wouldn't be selling the asset to anyone else anytime soon. "A more appropriate description is buyer of last resort, with the risk to the central bank's balance sheet that comes from performing that role."Debelle set up this edict to the industry with a preamble that surveyed "another concern that is often expressed around bond market liquidity, namely that, with the decline in intermediation by the banks, the likelihood of market dislocation is higher."He said "this often comes up in discussions around the consequences of the Fed tightening monetary policy resulting in a large sell-off in bond markets. "As I said last year, I think the issue is not so much one of a decline in liquidity as much as a decline in the capacity to warehouse risk. "In the past, when there was a large sell-off in bond markets, liquidity was never that great. A bank has no more desire than any other investor to catch a falling knife. Bid-ask spreads widen considerably and the depth of book deteriorates. That has always been the case."But, he observed, "in addition to a decline in liquidity provision, banks now have less risk-warehousing capacity than they did in the past …. as a result of regulatory changes as well as their own risk tolerances, they are less willing and able to do this today."Debelle said "many real money investors are not able to move so quickly to take advantage of overshooting prices. The degree of discretion is generally not as large. Mandates often impose the constraint of not straying too far from benchmarks, and it takes a long time to change mandates to respond to changes in market circumstances. "If there is less capacity to do this, then prices will move by larger amounts and remain away from equilibrium values for longer. Volatility will be higher. In itself, this is not necessarily a bad thing. It is what it is. But with higher volatility, the distribution of price movements will have fatter tails."Overshooting will be more likely and that can have long-lasting and more deleterious consequences," he said.Debelle spoke at the Actuaries Institute Banking on Change conference in Sydney.