In this paper, we examine the role of information in safe asset liquidity crises, using the 2022 UK government bond market turmoil as a laboratory. Contrary to traditional adverse selection models, which predict higher liquidity costs due to the presence of informed traders, we find that dealers initially reduce liquidity costs for informed investors, but subsequently raise costs and reduce liquidity for the broader market. Using novel trading data to carefully isolate the role of information from other channels, we interpret this as evidence of a dealer learning process in which liquidity provision is first extended to informed traders but later restricted as dealers gather information. We also document that dealers exploit their informational advantage in anonymous interdealer markets and that similar dynamics are present in other crises. These behaviors reverse when central bank interventions restore market liquidity, thereby mitigating the effects of dealers' information chasing.

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We exploit the surprise announcement of a central bank funding scheme to test how public liquidity provision affects credit market outcomes. Contrary to the notion that public liquidity is only a substitute for private liquidity, banks that are more exposed to stress in private wholesale funding markets use less central bank funding. We rationalise this pattern by establishing an “equilibrium channel” of public liquidity. The mere availability of central bank funding compresses the price of private wholesale funding. This stimulates lending by banks exposed to wholesale funding, regardless of whether they actually use the central bank funding. Using a shock to the design of the scheme, we show that the “strings attached” to central bank funding help to explain why it is an imperfect substitute for private funding.

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