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Here comes the great bond liquidity drought

Liquidity in the world’s bond markets has reached crisis point. Investors can no longer rely on banks to provide a crucial intermediary function in secondary markets. It’s now time that investors took responsibility and did something about the liquidity challenge themselves. Failure will be disastrous for global financial markets. Euromoney investigates.


 

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On the following pages, Euromoney delves into the reasons behind the current liquidity drought, warns of further potential implications and investigates what must be done to fix the present state of the markets. Current subscribers and non-subscribers alike can have a look at facets of this report.

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The great bond liquidity drought... and how to fix it

Liquidity is drying up across the bond markets. Regulations designed to curtail banks’ leverage have had the unintended consequence of also sharply reducing their ability and willingness to make markets in corporate and even government debt. New regulations on the leverage ratio that will reduce banks’ repo funding books threaten to make matters even worse and to spread the drought from credit markets to rates, the underpinning of all financial markets.

Secondary markets are close to a breakdown that will soon imperil the primary markets on which companies and sovereigns depend for funding. All that is masking the decay is the extraordinary actions of central banks.

Their stimulus has created what looks like an asset bubble, siphoning abundant investor flows into bond funds all betting on declining rates and narrowing credit spreads. Asset managers’ trade-execution desks have been more worried about how to buy bonds than whether or not they might ever be able to sell them again. And the enlarged primary markets, in which Apple was able to sell $17 billion of bonds in a single go, with lead banks eagerly trading bonds in the first few days after launch, have obscured the underlying structural weakness in secondary markets.

But just take away the central banks’ extraordinary provision of stimulus and liquidity and those investors will be left gasping.

Investors have spent much of the past few years blaming banks for failing to make markets, blaming regulators for harming their ability to do so and even blaming borrowers for issuing too many different bonds that it’s near impossible to trade.

It’s now time that investors took responsibility and did something about the situation themselves. New venues are being set up for asset managers to trade with each other as well as did the bank dealers. These new venues bring new trading protocols, new choices besides the now inadequate request-for-quote model that institutionalizes investor dependence on dealers to make markets.

These new solutions will succeed only if investors fully embrace them. They must dare to show their orders and start making dealable prices to other asset managers, rather than just sitting back and waiting for dealers to quote prices to them.

That requires a new way of doing business. But if investors don’t make the effort, the consequences might be disastrous.


E-BOOK - BOND LIQUIDITY SPECIAL ISSUE



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Euromoney has been tracking the implications of secondary market illiquidity on the global bond markets for several years. This has become the defining challenge for all participants in the global bond markets and Euromoney's unrivalled coverage of the issues, collated in this new e-book, is essential reading for anyone active in this market. 


FULL REPORT - SUBSCRIBER ONLY


"It is borrowers’ own issuance patterns that have led to this state of illiquidity. And what are they doing about it? Nothing. We need dealers and corporate treasurers to engage more constructively on this"

- A call to arms from Richard Prager, head of trading and liquidity strategies at BlackRock, the world’s biggest fund manager. So how many of the world’s top 10 borrowers engaged constructively with Euromoney when we called for comment? None. They all declined to talk on the subject  

 

The great bond liquidity drought...

Liquidity in the world’s bond markets has reached crisis point. Investors can no longer rely on banks to provide a crucial intermediary function in the secondary markets. It is time those fund managers started to think about providing that liquidity among themselves. If they do not, the consequences for the whole of the financial markets might be disastrous.   Liquidity in the world’s bond markets has reached crisis point. Investors can no longer rely on banks to provide a crucial intermediary function in the secondary markets. It is time those fund managers started to think about providing that liquidity among themselves. If they do not, the consequences for the whole of the financial markets might be disastrous.  


                                            ...and how to fix it

Investors hold about 99% of all bond inventory. Could all-to-all trading platforms provide the best answer to the crisis in liquidity? 


Liquidity: Fixing the present system

 

Amid the litany of complaints against the sell side, one trader at a large investment manager bemoans the continuing pretence of some banks that they are big traders in many instruments across all markets to all investors. He knows that they are not. Rather, dealers are conserving their ammunition to serve favoured clients and he understands why. He would just like to know where best to direct his business. 

Rupert Warmington, director of credit markets at Tradeweb
"We’re asking banks for sensitive information that we can communicate to buy-side clients that might be interested in their inventory"


-Rupert Warmington, Tradeweb


Corporate bond market goes back to broking

Salesmen hold the key to improving liquidity in corporate bonds. They just need to capture the network effect.


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Algorithmic trading set to transform the bond market

Intermediating the bond markets is shifting from a principal risk-taking business for banks to a brokerage business. At a time when the IMF is warning of bond market illiquidity, innovative solutions are springing up. In the high-volume government bond markets, trade-execution algorithms will be new drivers of efficiency. In the corporate bond markets, new systems will drive efficient internalizing of orders and matching across networks of dealers.

Bond markets: It’s time for open order books

 

Talk to big dealers and investors in the secondary corporate and government bond markets and it is clear that radical changes are coming. An exchange-like model with a central order book for bonds has been talked about for years. The time for action is at hand. The old over-the-counter market-making system is withering.



Leading bond investors warn of impending liquidity crisis

Some of the world’s biggest bond investors warn that banks are no longer able to provide the crucial intermediary function in the secondary debt markets.

Dealers divided over ability of Street to provide bond liquidity 

Dealers at the world’s biggest trading firms say the bond market correction in June, where big orders even in government bonds moved markets dramatically, demonstrated how dramatically liquidity has drained from the bond markets.

Deutsche Bank nears launch of new fixed-income trading platform 

The leading e-trading investment bank has been working with other dealers and buy-side clients on new bond trading platform Oasis, Euromoney reveals.

BlackRock demands frequent-issuer strategy rethink


Top 10 non-government borrowers under pressure to provide more liquidity by standardizing issuance calendar.