Bond market liquidity has dipped since the recession as a result of regulatory initiatives.
So says John Braive, vice-chairman of Global Fixed Income at CIBC Asset Management. He manages the Renaissance Canadian Bond Fund.
One set of rules affecting bond markets is Basel III, which deals with banks’ capital requirements. “Banks have to hold more capital now and have to have more capital against their bond positions,” he adds. So, “banks have become more stringent with the giving of capital to their trading desk[s].”
The Volcker Rule being implemented in the U.S. can also make it difficult for trading desks to maintain bond positions for longer periods. “In the past, [we’d] sell a chunk of bonds to a dealer [who] might hold them for a while. He’d slowly parses them out of his inventory. Now, [doing so] becomes more expensive and more difficult.”
The upside, says Braive, is that even though regulators have impacted bond liquidity, the market is larger than before and full of opportunity. “Volumes are still very substantial. We have found during certain periods that we can actually provide additional liquidity to the street, [as well as] buy cheaper securities where they’re actually marked out there in the marketplace.”
Reduced liquidity and trading constraints are negative for dealers, he concedes, but “[can be] positive for fixed-income manager[s]. We have deep liquid pockets and can provide liquidity to dealers in situations where they want to get [out of] big positions.”
Also, Braive sees bond liquidity improving as market volatility quiets. “We’ve had a lot of volatility in markets over the last four years. [But] over time, we’ll start to see this improve along with the overall global economy.”