Should Investors Be Worried About Bond Market Liquidity?

Comments by the FCA’s head of market infrastructure and a report from the Bank for International Settlements a have made bond liquidity a topical issue

Artemis Investment Management 21 April, 2015 | 2:25PM
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Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, James Foster, manager of the Artemis Strategic Bond Fund, explains the potential impact of liquidity risk on the bond market and the strategy he is employing to mitigate the risk.

Worries about liquidity in the bond market are nothing new. We have been talking – and writing – about them for a number of years. But recent comments by the FCA’s head of market infrastructure, a report from the Bank for International Settlements and high-profile articles in the national press have made liquidity a topical issue. This is a welcome development. To this point, not enough investors have been aware of the potential risks.

The crux of the matter is that the bond market has become a shadow banking system. The reason is obvious: bonds give a yield, whereas banks and building societies don’t. Rather than holding cash deposits yielding next to nothing, investors have been lured into buying bond funds. With banks reluctant to lend, companies have increasingly turned to the bond market for funding instead.

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Artemis Investment Management  is a leading UK investment manager, offering a range of funds investing in the UK, Europe and globally