News review : Fixed income

THE LIQUIDITY SQUEEZE.

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BlackRock, the world’s largest fund manager with $4.3 trillion in client assets issued a report claiming the corporate bond market was “broken” due to rock-bottom interest rates and low volatility which has created complacency among issuers and investors.

The fund management giant is not alone in its complaints. Despite efforts by BlackRock and its contemporaries to break the oligopoly of the banks, they have retained their lock on the corporate debt market. The top 10 dealers control more than 90% of trading, according to a report from research firm Greenwich Associates.

One of the main issues is that Basel III combined with the Dodd-Frank Act prompted Wall Street bond dealers to cut their inventories of the debt, even as the market has expanded. The result is that index fund managers who must acquire certain bonds to be able to track specific benchmarks are struggling.

In its report, BlackRock notes that the dangers of price gaps and scant liquidity have been masked in a benign, low interest-rate environment, and need to be addressed before market stress returns. It is calling for new solutions to improve liquidity.

“These reforms would hasten the evolution from today’s outdated market structure to a modernised, ‘fit for purpose’ corporate bond market,” according to the six authors, including vice chairman Barbara Novick and the head of trading, Richie Prager.

BlackRock recommended unseating banks as the primary middlemen in the market and shifting transactions to electronic markets. It also proposed reducing the complexity of the bond market by encouraging corporations to issue debt with more standardised terms. In addition, it suggested revamping the method by which traders offer and accept prices; and behavioural changes for market participants including investors, issuers and underwriters.

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