Regulators fail to find ‘smoking gun’ in bond liquidity reports

AFME conference panel says regulators have failed to look to the future when exploring bond liquidity.

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.

Regulators worldwide remain adamant liquidity has not declined in bond markets. In October, the Federal Reserve Bank of New York authored a report and argued there was ‘no strong evidence of deterioration’ in bond market liquidity since the financial crisis.

The report found evidence from measures of depth and price impact of reduced liquidity, but this was “within historical variations and far from crisis levels.”

Only recently, the Financial Conduct Authority (FCA) found via an in-depth study liquidity has deteriorated in bond markets, despite previously claiming to have found ‘little evidence’ in the past of a quantifiable deterioration.

Mawby added: “Regulators should look at what happens if the Western world normalises monetary policy or the zero interest rate environment changes. In that respect, you would see net outflows in fixed income, which is a major problem.

“The market has been tested, with Pimco and Bill Gross but those assets were shifted; it’s easy for someone to bid on assets if there are net inflows, but the problems arise from net outflows.”

Mariano Goldfischer, global head of credit trading at Crédit Agricole, added: “I agree, through the RFQ model there is not a major issue with liquidity, but with the potential outflows with particular events like the election in France and Brexit.”