Trends to note
With regards to the potential impact on specific types of bond a clear pattern emerges.
In support of the CFA Institute’s conclusion that corporate debt has been more heavily affected, 61 per cent highlighted decreased market liquidity in high yield corporate bonds - financial, and only 26 per cent witnessed the same trend in government bonds.
“Government bonds will almost always be more liquid than corporate bonds, simply due to their perceived safety as government backed instruments which links to their consistent, high demand,” says Mr Stone.
He goes further: “The market for government debt is also far simpler and more homogenous than that for corporate debt, where companies can have dozens of fixed income line entries, each of which bear little resemblance to each other.
"While global central bank quantitative easing programmes have targeted corporate bond markets selectively, their focus has been very heavily on government bonds, providing the market with a permanent buyer to date."
Although government bonds provide the greatest liquidity, it can also be found elsewhere, according to Mr Trindade: “Bonds with high credit ratings, such as those issued by supranational agencies and large corporates, tend to be very liquid.”
This subsequently poses a serious question for investors. Despite the recent US fed rate hikes, global central bank interest rates have been floundering at record lows, and as the Bank of England showed last year, some continue to fall.
In even more extreme circumstances, Germany and Switzerland’s central banks both issued negative yielding debt last year as European bond rates reached dire straits.
High yields or liquidity?
Therefore, in order to secure greater levels of liquidity, investors would need to weigh the importance of either potentially higher yields or a more easily tradeable asset.
Despite the regulator’s conclusion that liquidity issues have only surfaced since 2014, the 2008 financial crisis was turning point for market liquidity, according to Mr Bennett.
He says that investment banks were “less willing to hold a significant volume of bonds on their own books, mainly due to regulatory restrictions.”
Mr Bennett adds that this has constrained the liquidity they provide to asset managers: “In general, liquidity is good when markets are benign, and then it reduces when markets are weak. That was the case even before the crisis.”
This also extends the debate that if bond liquidity has become such a pressing issue, then a clear measurement of its liquidity should be readily available.
