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Radical plans to address bond investors’ liquidity fears

Frequent issuers on both sides of the Atlantic are exploring new ways to concentrate their high-quality liabilities into fewer more-liquid bonds to avoid paying a premium as markets sell off.


Amid rising bond-market volatility, frequent borrowers are finally considering how they can contribute to greater liquidity, ease investors’ long-standing fears of being trapped in losing positions as bond prices gap down and avoid paying an illiquidity premium for new issues.

Reasoning that investors will put a value on the ability to trade in and out of an asset in size at a tight spread and with minimal impact on the secondary market price, borrowers are taking the obvious step of concentrating previously dispersed liabilities into fewer outstandings.

Large institutional investors, such as BlackRock, have been urging this for years and must feel it is long overdue and even now only happening in baby steps.

German government-guaranteed KfW, for example, which sold €75.5 billion of new bonds in the year to December 3, 2018, through 140 separate issues, has at least concentrated a larger part of this funding (73%) in its euro and dollar benchmark programmes than ever before.

The market in government and other high-quality bonds in Europe was supported ­– some would say distorted ­– by the Eurosystem’s public sector purchase programme (PSPP) in 2018. And this at times, especially amid high demand in the first part of the year, left investors struggling to get hold of KfW bonds in the secondary market.

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