On October 17, Bank of New York Mellon, the world’s largest custodian bank, and HSBC announced the latest initiative to bolster liquidity in the bond markets in collaboration with Algomi, the innovative distributor of pre-trade data.
While there have been signs of improvement in fixed income liquidity since all-to-all trading took off a couple of years ago, with asset managers at times now making prices to each other on platforms such as MarketAxess, dealers continue to report a bifurcated market. In a small number of bonds, executing large-size trades without moving the price is still possible at a reasonable spread.
In the overwhelming majority, however, especially in the credit market, liquidity has all but disappeared. Investors taking on positions to capture spread in the corporate bond market must buy and hold rather than seek to trade for relative value, beyond a week or two after new issue.
And as rates now start to rise that illiquidity may have as yet unseen and damaging impacts on the cost of funding for businesses.
While the volume of debt outstanding has almost doubled since the eve of the great financial crisis ten years ago, turnover has shrunk. In a recent study by the UK Financial Conduct Authority, a leading fixed-income trading house reported that the number of corporate bond trades that actually result from orders and request for quotes has declined from around 65% before the financial crisis to between 20% and 25% in 2017.
