M&G’s Woolnough denies bond market liquidity concerns

The amount of bonds being traded is “on a par with 2007” and is not showing symptoms of a liquidity crisis, M&G’s star bond fund manager Richard Woolnough has said.

Speaking out after months of speculation regarding the liquidity of corporate bond markets, Mr Woolnough (pictured) wrote on the M&G Bond Vigilantes blog that turnover among bond traders had not collapsed by 80 per cent as had been claimed by some commentators.

Instead, he claimed trading volumes had recovered to levels last seen in 2007 before the onset of the US housing market collapse which triggered the credit crunch.

M&G has been seeking to slow inflows into Mr Woolnough’s giant Corporate Bond and Strategic Corporate Bond funds since the summer, citing a desire to maintain performance after huge inflows into the portfolios.

In July he said on a client conference call that it was in the interest of investors to “explore ways to slow down money and so control growth” of the investment grade bond funds.

“It has been a great few months for corporate bond issuance,” Mr Woolnough said this week.

“This huge flush of new transactions where buyer, or investor, meets seller, or issuer, shows that the primary market is in a historically healthy state, with buckets of liquidity.”

Kames Capital’s £462m Investment Grade Bond fund manager Stephen Snowden last week warned that several banks had reduced or were seeking to reduce their operations in fixed income trading as it had become too costly. He said this would result in it becoming increasingly difficult to trade large positions in bonds.

But Mr Woolnough said: “The actual historic trading volume in secondary corporate bonds, which gives a stronger indication of real, rather than hypothetical, liquidity... shows that turnover has not collapsed 80 per cent.

“In fact daily volumes are on a par with where they were in 2007. It is also worth noting that investment banks’, and their shadow bank counterparts’, percentage of this volume will have fallen, and so it is likely that transactions between genuine end investors have increased substantially in real terms, and as a percentage of this turnover.”

Mr Woolnough added: “It is hard to know what average daily liquidity should be, as the market has been evolving in the recent dramatic economic conditions.

“However, the total liquidity of all transactions, both primary and secondary, indicates a growing, interesting market place as banks are being replaced by the corporate bond market as the funding vehicle of choice.”

The FSA wrote to bond fund managers earlier this year asking for details of how long it would take them to liquidate their portfolios if a large number of investors demanded redemptions.