Traders of Asian fixed income assets should re-evaluate liquidity contingency plans due to the changing profile of those investing in Asian bond markets, according to a new report.
The Financial Stability Review published by the Monetary Authority of Singapore warned market participants to re-evaluate portfolio exit strategies and to give better consideration to whether they have priced in the risk of bond holdings.
It stated asset managers’ increased holdings of Asian fixed income assets and the increased participation of retail investors in Asian high yield bonds could exacerbate market volatility as monetary policies shift going into 2016.
It said: “There are signs that asset managers could be underestimating the liquidity risks associated with bonds.
“While more bond market participants have sounded caution about the risks of a drop in liquidity, it is not clear if they have sufficiently prices in the appropriate liquidity risk premium or adapted their trading behaviour to the change in market liquidity.”
The report added that the explosion of fixed income exchange traded products, together with a compression of liquidity risk premia may have disguised the drop in market liquidity to traders.
It added: “There is a need to alert less-informed bond market participants to the new normal state of liquidity to reduce the risk of a disorderly exit.”
TwentyFour Asset Management is among those fixed income managers to have drawn up a defensive plan to protect investors.
Chris Bowie, partner at TwentyFour, said he is cautious about the implications for the bond market given the rapid growth of the ETF market.
He said: “What concerns me is more around the ETF landscape. If you saw very large liquidations from ETFs, they could basically own the whole index.”
Bowie said that he believes closed-ended vehicles are a better vehicle for credit in the current climate because they don’t have the same time pressures to meet redemptions as open-ended funds.
He explained: “We believe less liquid securities should be owned in closed-ended vehicles (we have three), we [soft] close funds long before size becomes an issue and we only own our best ideas; that is why the number of holdings has to remain modest.”