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.
The great bond liquidity drought... and how to fix it
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
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
Salesmen hold the key to improving liquidity in corporate bonds. They just need to capture the network effect.
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.
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 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.
The leading e-trading investment bank has been working with other dealers and buy-side clients on new bond trading platform Oasis, Euromoney reveals.
Top 10 non-government borrowers under pressure to provide more liquidity by standardizing issuance calendar.