ESMA finds sovereign bond liquidity has increased

Latest report on trends and vulnerabilities suggests sovereign bond liquidity has improved, but corporate bond liquidity remains an issue.

Liquidity in the EU bond market has increased since the financial and sovereign debt crisis, according to a report from the EU regulator.

The European Securities and Markets Authority (ESMA) said in its report on trends and vulnerabilities its findings reveal liquidity has been ‘relatively ample’ in the sovereign segment.

Statistics between July 2006 and December 2016 showed net inventory positions - which reflect the level of risk a market maker is willing or able to assume - increased over that time period.

ESMA stressed the importance of distinguishing between primary and secondary EU sovereign bond markets. The primary market relates to new debt issuance whereas the secondary market concentrates on wholesale interdealer platforms.

“The indicators reported so far point at increased overall liquidity in the market, following the stress characterising the financial and sovereign crises,” the report said.

ESMA suggested the increase could be due to the effects of supportive monetary policies in recent years’: “More recently, in a supportive economic policy environment, market liquidity seems to have improved in the sovereign bond segment.”

However, corporate bond liquidity remains an issue in terms of liquidity. “This stands in contrast to the corporate bond sector, in which we have been observing phases of lower liquidity in more stressed periods,” ESMA concluded.

Regulators and authorities globally who have sought to explain declines in bond liquidity have failed to find the ‘smoking gun’ because they are not looking to the future.

Panellists at the Association for Financial Markets in Europe’s (AFME) market liquidity conference in London, agreed liquidity has declined across the market but reports have failed to find vital evidence to support this.

“All reports are failing to find the smoking gun because the regulators are looking in the wrong place… they are looking at market structure rather than taking it a step further,” said Jon Mawby, senior portfolio manager at GLG Partners.