NEW YORK & LONDON--(BUSINESS WIRE)--US credit investors expressed high levels of concern about secondary corporate bond market liquidity in the latest Fitch Ratings/Fixed Income Forum senior investor survey.
Reduced liquidity in the US corporate secondary bond markets prompted 37% of respondents to our April survey to be "very concerned" and 49% to be "concerned." Participants noted that the liquidity issue is the largest risk to markets as a whole and that the next downturn and/or period of weaker sentiment could be more disruptive than in August 2011.
Liquidity in the corporate bond market has declined as the bond inventories of broker dealers have dropped in the wake of the financial crisis. This dynamic has been an unintended consequence of post-crisis regulation. The Basel III capital and liquidity rules have made it more costly for large broker/dealer banks to hold inventories of securities. As a result, the willingness of the large banks to play intermediary roles in the fixed-income markets has diminished. Additionally, the Volcker Rule of the Dodd-Frank Act restricts proprietary trading by banks and affiliated broker/dealers, further reducing the number of active traders in the market. With the shock-absorbing function of market-makers reduced, spread volatility has picked up.
In December 2014, a Fitch Ratings analysis of five of the largest US investment-grade corporate bond ETFs found that average trading frequency and volume varied significantly across individual issues making up the ETFs, with the largest holdings accounting for a disproportionate share of underlying bond liquidity. Bond trading activity fell off quickly as the size of bond issues declined. Fitch considers this a risk, not only for bond ETFs, but also for all bond investors facing price pressure during periods of significant market volatility. Please see associated research link.
The Fitch Ratings/ Fixed Income Forum April investor survey addresses investors' views on the significant risk factors facing the US credit markets, the factors for ensuring a sustained US economic recovery, as well as the general economy.
The survey was conducted between March 12 and April 10, 2015 and represents the views of 75 senior managers. The full report, entitled "U.S. Senior Fixed- Income Investor Survey April 2015", covers all major corporate bond sectors and will be published in the next 1-2 weeks.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
Corporate Bond Liquidity: A Look Below the Surface