FCA dismisses fears over bond liquidity

Bond liquidity has improved over the past eight years, according to a paper produced by two economists at the Financial Conduct Authority. These findings completely contradict the anecdotal evidence of those working in the market.

FCA dismisses fears over bond liquidity

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No evidence that bond liquidity has become more flighty

The authors of an occasional paper written following analysis of transactional data relating to the UK corporate bonds market claim that fears that bond liquidity has been detrimentally affected by changes in the market in recent years are unfounded. They say that the market has not shown any major reactions to economic shocks or to recent regulatory interventions. In fact, they suggest it has had the opposite effect.

This should allay the fears of fixed income managers who have expressed concerns over bond liquidity, claiming that it is one of their major worries.

The economists went on to say that even though the inventory of dealers has dropped in recent years, bond liquidity has not declined.

However, they do say that severe economic stresses have a detrimental impact on bond liquidity. They say that although the market fluctuates slightly during these periods, this has remained stable overall.

According to their paper, fears have arisen due to a focus on anecdotal evidence and a few proxy measures rather than facts. The authors also state that liquidity is having more of an impact on bond spreads now than it has in the past few years.

Confidence in the market should return soon

The new light this throws on the topic should help to increase confidence in the market. The full report, which was written by Matteo Aquilina and Felix Suntheim, is available as a pdf download from the FCA website.

Companies like Robert Stones Target Markets believe this data analysis should help raise confidence in the market and allay recent fears.

To ensure there is liquidity in the market in the event of a major blip in the system, Aberdeen Assets Management’s CEO suggests that central banks should be prepared to step in and buy bonds to prevent widespread panic.

It is hoped that this will put a stop to the scaremongering and diminish fears in the market as liquidity appears to be fluid and stable, despite a few temporary blips.

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