Bond Market Liquidity Precarious: BIS

A report by the Bank for International Settlements says bond market liquidity hinges on the actions of just a few fund managers.
Katie Kuehner-HebertMarch 18, 2015
Bond Market Liquidity Precarious: BIS

Several staff members at the Bank for International Settlements in Switzerland, the central bankers’ bank, are worried that actions by just a few big fund managers could negatively impact bond market liquidity, particularly in future crises.

“Market liquidity may increasingly come to depend on the portfolio allocation decisions of only a few large institutions,” according to a BIS report released Wednesday, according to a Financial Times story.

The BIS report authors are also concerned that investors are buying riskier assets in the low interest-rate environment, the FT wrote. The U.S. debt market is vulnerable, as evidenced by last October’s “flash crash” in Treasury yields.

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“What happens in financial markets does not always stay in financial markets, and we would do well to be on the lookout for any potential economic impact from financial market disruptions,” BIS head of research Hyun Shin said in the report.

While liquidity in government bond markets has recovered since the financial crisis, the BIS’s report authors see signs of increasing risks in less liquid markets, such as for corporate bonds.

Trading volumes in that sector have not kept pace with the surge in debt issuance. Moreover, exchange traded funds that promise daily liquidity are expanding.

Investors told the FT that they’ve prepared for any liquidity crunches in riskier bond markets.

However, the BIS report’s authors warned that “liquidity could prove fragile if everybody heads for the exits at the same time — a risk that needs to be internalized by the bond investor community.”

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