In its October 2015 global financial stability report the IMF rehearsed growing concerns that changes in market structure appear to have increased the fragility of bond market liquidity. Reduced market making by banks, in response to new regulation, has had a detrimental impact, as have restrictions on derivatives trading. And worryingly, the IMF notes evidence that the bond market is the medium through which monetary policy affects the market liquidity of all other asset classes as well.
This is no revelation to readers of Euromoney, which has covered the dangers of evaporating bond market liquidity since September 2013.
By spring of this year, the fear was hard-wired into investors’ minds as shown in the responses of 1,924 asset managers, insurance companies, hedge funds and banks to Euromoney’s fixed income investors survey for 2015.
Asked how concerned they now are about the lack of liquidity and potential inability to turn round large positions without moving the market price, an eye-catching 80% of the sample said they were either reasonably concerned (44%) or very concerned (36%).
Euromoney reported throughout the year on various innovations to address the problem such as Algomi’s Honeycomb system and B2SCAN which aim to improve pre-trade information for investors on which dealers they should direct their requests for quote to.
Sadly, the majority does not think the various new bond trading systems and protocols set up to address lack of liquidity will help. While they are open-minded about using other trading protocols beyond request for quote and transacting on exchange like all-for-all platforms or crossing networks, 63% of respondents to our investor survey think these innovations will not improve matters.
If new capacity is what is needed by the end of the year new fixed income market makers were at last emerging, albeit from among the hedge fund and high frequency trading firms about which investors remain suspicious.
