Liquidity Drains Out of Bond Market as Top Funds Swell, BIS Says

Nov. 24 (Bloomberg) — Liquidity is draining out of the world’s bond markets because securities are being held by a shrinking number of fund mangers and banks are cutting back on trading, according to the Bank for International Settlements.

The world’s biggest 20 asset managers boosted their holdings of bonds to $9.4 trillion, an increase of $4 trillion in the four years following the financial crisis in 2008, according to the Basel, Switzerland-based BIS. As bond dealers reduce trading, decisions by those asset managers will have a greater impact on liquidity, according the report from a group set up by the committee on the global financial system.

“Market liquidity could become more dependent on the portfolio allocation decisions of only a few large institutions,” the BIS group led by Denis Beau, director general of operations at the Banque de France, wrote in the report. “Liquidating these assets could prove more difficult than expected when market sentiment deteriorates.”

Bond trading has declined as issuance has grown, with less than 5 percent of the market changing hands each month in the U.S., down from about 20 percent in 2007, according to the report. That lack of liquidity increases the risk traders won’t be able to find buyers should there be a rush to exit when policymakers raise interest rates.

Central bank stimulus and suppression of benchmark borrowing rates is worsening the situation because investors have taken on more risk in hard-to-trade instruments such as high-yield bonds, according to the report.

To contact the reporter on this story: John Glover in London at [e-mail] To contact the editors responsible for this story: Shelley Smith at [e-mail] Michael Shanahan