Fixed IncomeAug 10 2015

Bond transparency rules may scare investors off

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Bond transparency rules may scare investors off

New transparency rules on bond liquidity could do more harm than good, scaring investors away from large parts of the market, say managers.

Concerns over liquidity have been growing and are expected to worsen when the US Federal Reserve raises interest rates.

Last month its chair, Janet Yellen, noted valuations on “lower-rated corporate debt” were becoming “stretched”.

The European Securities and Markets Authority (Esma) is planning to publish new technical standards in late September. These will label bonds liquid or illiquid, depending on size.

In his blog, Investment Association (IA) chairman Daniel Godfrey suggests “optimal thresholds”. He says corporate bonds under €2bn (£1.4bn) and sovereign bonds under €5bn should be deemed illiquid.

The IA has also suggested to Esma additional thresholds for the period just after issuance, when bonds are most liquid. In the first two weeks, a €500m corporate bond would be deemed liquid. A sovereign bond of €1bn or more would be considered so for three months.

David Coombs, Rathbones’ head of multi-asset investments, said: “I would be cautious about these labels as they could drive investor behaviour. When you put artificial labels on the bond markets you change the dynamics very quickly.”

Christine Johnson, Old Mutual Global Investors’ head of fixed income, warned of possible “unintended consequences”. She added: “The minute you stick an illiquid label on something, you are going to make it more so and make a difficult situation worse.”