[private role=’subscriber’]Bank of England warning to bond managers
Last week, as global bond yields hit record lows, Bill Gross of Janus Capital Group warned that bonds were at the ‘point of low return’ and that investors might be better taking some ‘chips off the table’ as volatility and reduced liquidity are likely to become an issue.
Those comments echo similar thoughts aired in a recent speech by Bank of England governor Mark Carney. In that speech he warned that while the GFC was primarily a credit crisis, the next crisis is likely to be a liquidity crisis. Yields have been driven so low across the globe, due to an insatiable demand, that investors have become complacent about the ability to divest those investments when needed.
According to Carney, much of the liquidity in markets over recent years has been provided by large banks making markets and holding risk inventory. But new prudential requirements for banks have seen reduced capacity for taking on risk and many cases of trading desks being shut down altogether.”
Fundamentally, liquidity has become scarcer in secondary fixed income markets. “It just appears that it hasn’t”, said Carney. The ability of dealers to hold risk inventory has “declined by 70% since the GFC while the stock of fixed income assets has doubled.” Further, he said that liquidating a position now takes on average “seven times as long as it did in 2008.”