Money managers and other participants in secondary European corporate bond markets must act quickly to prevent a further decline in liquidity and ensure the development of the sector.
The market for publicly issued bonds by financial and non-financial corporations in the European Economic Area is worth more than €3.6 trillion ($3.9 trillion) in terms of nominal amounts outstanding, said the International Capital Market Association in its latest report, published Wednesday.
However, interviews with and surveys of buy-side and sell-side sources showed a perceived overall decline in secondary market liquidity since ICMA's 2016 study. "Block trades, however, appear to create the biggest challenge for buy-sides," while liquidity for smaller trades appears to be "adequate," the report said.
Systemic hazards were also highlighted by ICMA, with participants in the report expressing concern about the intersection of the growth and concentration in corporate debt held by money managers and the predominance of passive strategies.
"The worry is that in the inevitable downturn, possibly triggered by a geopolitical or related macroeconomic crisis, a disorderly rush to the exit would like ensue. The limited capacity of market makers to offer liquidity, and the absence of alternative investment funds willing to take the other side, are expected to exacerbate any such market 'corrections,' " the report said.
Market structure is evolving rapidly, with money managers "looking to new approaches for sourcing liquidity, either becoming more sophisticated in their interaction with market makers, or through diversifying their use of trading venues and protocols," the report said.
ICMA's overall recommendation is for policymakers, regulators, money managers and other participants in the market to work to develop Europe's corporate bond markets. "Liquidity in the European corporate bond secondary market is in long-term retreat," the report said. "Without reengagement and swift action by policymakers and regulators, it is set to decline further, thereby undermining the objectives of the (Capital Markets Union) to improve the efficiency and resilience of the European corporate bond market."