Looking after number one

Fears over bond liquidity are once again making headlines around the world, with policy leaders and government officials now joining the debate.

In Asia, the latest set of recommendations have come courtesy of the Financial Stability Review released at the end of November by the Monetary Authority of Singapore.

We may have arrived at this current point precisely because of regulation, but it hasn’t stopped regulators calling on market participants to draw up new escape routes in case everybody rushes to the lifeboats at the same time.

In the MAS report released in November there was recognition that those on the buy-side have familiarised themselves with the nearest muster points, but MAS still believes liquidity risks are being underestimated.

The increased share of the market that asset managers now have was cited as a factor that needs greater attention as previous mini sell-offs show managers can be forced into ‘herd’ behaviour.

While this is certainly true, it is perhaps a little overblown for MAS to waggle its finger at fund firms stating they are underestimating the risks.

Don’t get me wrong, there is most definitely a liquidity issue. And yes, firms have been guilty of using common benchmarks. I would even acknowledge that many fund firms – even the biggest – follow the behaviour of their peers.

But buy-siders state that the difference in perception of risk is not due to “bad calculations” but the result of calculations based on different response scenarios.

Yes, there is a very real liquidity risk in bond markets at the moment but the extremes of the market narrative are making things worse.

Let’s get this straight. I don’t buy the self-serving suggestions from some of the world’s largest investors that the day of the extreme sell off will never come. It will.

But it’s not just the asset management firms who are making self-serving statements. Let’s face it, no regulator wants to be guilty of not sounding the alarm before the ship hits the iceberg and no firm wants to frighten off all of its customers.

There are lessons for us all since the global financial crisis. Product sellers shouldn’t over promise, investors shouldn’t believe something is too good to be true and regulators shouldn’t release sweeping broad statements into the market without specifics.

Mind you, not everyone is looking after their own interests… At this year’s SIBOS Conference in Singapore, FinTech exhibitors were keen to tell me that they have many of the solutions to our liquidity concerns. Oh, wait a minute…