As noted in the July 2015 edition of the
Investment Management Review, there’s been growing concern that global bond markets could suffer a liquidity drought.
But asset manager BlackRock believes these concerns are “unnecessarily shrill” and last week published two white papers,
Addressing Market Liquidity and
Bond ETFs: Benefits, Challenges, Opportunities, to show that there is a range of solutions to these problems – and no need to panic.
New trading protocolWriting for
Investment Week, Anna Fedorova unpicks the first paper, which calls for new trading protocols for fixed income securities, pushes for a review of the way trades are reported to the market and suggests ways for asset managers to discourage panic selling.
Fedorova notes that liquidity issues have been increasing in recent months, “with even seasoned bond investors, such as Bill Gross, expressing their concerns”. She goes on to reveal that BlackRock’s proposals also include a new trading protocol for bonds, which “would see buy and sell orders matched up” in much the same way as equities.
“Meanwhile, asset managers themselves can improve matters by allowing temporary short-term borrowing, as well as making those shareholders wishing to make a redemption pay a liquidity premium during times of stress,” she adds.
Investment Week coverage
Exchange-traded funds
Bloomberg View Columnist Matt Levine considers the second paper – and he’s convinced that the outlined proposals have the potential to improve liquidity.
The paper argues that “exchange-traded funds (ETFs) improve bond-market liquidity” by giving people “bond exposure through liquid exchange-traded instruments,” says Levine. It also claims that ETFs “don't pose any run or liquidity-illusion risk”.
“I have to say that I basically find this convincing,” he says. “In normal times, ETFs should improve liquidity, and in crunch times, they probably shouldn't make anything worse.”
Bloomberg View opinion
Increased reliance issuesHowever, according to Tom Lydon, who writes for
ETF Trends, some market observers are concerned that an increased reliance on ETFs “could cause more people to come up against liquidity issues once a major sell-off occurs, as ETFs try to redeem shares in an illiquid primary market”.
In response to these concerns, he quotes Head of BlackRock’s iShares ETF unit, Mark Wiedman, who reaffirms that ETFs are helping to resolve liquidity problems. “I think we can say that with 100% confidence,” Wiedman adds.
Lydon also notes that ETF providers often disclose liquidity risks and offer greater freedom when handling redemptions. These include “enacting ‘out of the money gates’, paying back large institutional investors in kind and using short-term borrowing to meet redemptions,” he writes.
ETF Trends article
Seen a blog, news story or discussion online that you think might interest CISI members? Email
joanna.lewin@wardour.co.uk