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March 19, 2015 01:00 AM

Money managers worried about credit market liquidity — survey

Sophie Baker
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    Money managers are increasingly concerned about scarce credit market liquidity, with worries extending beyond high yield and emerging markets bonds, and to U.S. and European credit markets, said a new survey.

    In meetings with senior executives of money managers representing more than $10 trillion in assets under management, Oliver Wyman and Morgan Stanley found that secondary market liquidity was a top concern. Concerns over U.S. and European credit markets were expressed, “given low market liquidity,” said the firms’ latest annual Wholesale & Investment Banking survey.

    Some managers also expressed concern over areas of the rates markets and emerging markets foreign exchange.

    The dislocation between the U.S. and the rest of the world in raising interest rates was highlighted, along with worries over more money flowing into less liquid bonds.

    The survey also addressed growing concerns that money managers might be subject to stress testing, akin to those in the global banking system.

    “We expect asset managers will be asked to shoulder more regulatory burden, contrary to what many asset managers think, and the question for us really is ‘to what degree?’” wrote the survey’s authors. “We expect regulators are likely to require some form of stress testing of select funds, expanding what some asset managers have started to do already. Depending on how it is calibrated, this may result in asset managers holding even more liquidity in funds to protect against a tail risk event, as happens with the bank capital rules, even if base liquidity is in line with historical redemptions,” they wrote.

    The authors said they are not advocating this bank-style regulation for money managers but feel that “as we engage with policymakers, there may be a few lessons they feel appropriate to adapt.”

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