When everyone was selling and no-one was buying liquidity vanished. However, as bond market outflows lessen, and in some cases reverse, many buy-side traders find they are still faced with limited liquidity as a result of continued dealer inactivity.
“The move up is actually harder to trade than the move down,” notes one trader.
Analysis by BlackRock, has found that outflows from passive corporate bond funds reversed at end of March. Overall, fixed income exchange-traded products (ETP) had their largest monthly outflow on record in March – and the first since June 2015 – with US$34.5 billion out across global ETPs. Despite elevated market volatility, trends did start to emerge with money returning towards the end of the month, according to BlackRock’s report.
That happened as investors who had sold out of globally-listed high yield (HY) and investment grade (IG) credit fund consistently from the last week of February through to mid-March (-US$30 billion) started to reverse that into the end of March as central bank easing – including corporate bond purchases in Europe and the US – supported sentiment towards credit.
BlackRock reported, that from 22 March, investors added US$8.6 billion into euro and USD IG exposures and US$2.5 billion into HY.
According to analysis of the US market by Morgan Stanley, the week of 30 March finished saw US fixed income funds driving the bulk of outflows in US markets, despite moderating week on week, with US$18 billion of outflows versus US$53 billion outflows for the previous week.
In the US domestic bond mutual and exchange-traded funds continued to see “outsized outflows”, almost entirely driven by the mutual funds while high yield active and passive funds saw their strongest week of inflows.
“We had seen markets with all offers and no bids [during the sell-off], even in normally liquid rates markets,” says the head of international trading at a major asset manager.
As the directional flow has lessened, the potential to both buy and sell might have been expected to improve. Yet the fixed income market, which has a considerably larger number of issued securities than any other market, is still struggling to match buyers and sellers, without banks warehousing the risk of holding those securities to bridge the timing of buying and selling for a period.
“Liquidity is a challenge in either direction,” notes another senior fixed income trader. “I think what you are seeing is a reality check for all. The banks are simply not there anymore, so if you liken this to 2008, the situation is worse.”
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