For some time YieldReport has been looking at the how bond market liquidity has been changing. Even Bank of England chief Mark Carney warned in late 2014 that bond market liquidity was likely to be the basis for the next financial crisis. For some time investment banks have been shutting down trading desks as regulators make trading bonds and carrying inventory more difficult and expensive.
In normal markets this would mean higher levels of volatility as investors seeking to liquidate bonds or bond portfolios take longer to do so because markets are thinner and prices are wider. But markets are anything but normal.
Insatiable central bank bond buying has pushed yields around the globe to record low levels. Just last week bonds in the UK, Spain and Ireland all made record lows. A huge appetite for bonds has seen a large percentage of bonds around the world at negative yields.
Against this backdrop bond fund managers have become increasingly powerful as they have the firepower to buy bond inventories and set pricing. Whereas once there were bank trading desks that would stand in the middle of transactions, increasingly bond fund managers are dealing directly with buyers and sellers, dictating pricing.
YieldReport came across a terrific article on Bloomberg this week that highlights how the rise of the buy-side has changed the way bond markets operate. Perhaps the more interesting aspect to it is how liquidity will play a key role when the great quantitative easing experiment finishes. You can read the Bloomberg story here.