Fixed Income  

Biggest bond funds cornering the market

Biggest bond funds cornering the market

The biggest funds in the Investment Association’s Sterling Corporate Bond sector are taking up a major chunk of outstanding domestic bond issuance, potentially crowding out other portfolios, data from Bloomberg shows.

The figures revealed that at the end of May the five largest funds in the sector represented £25bn in assets under management, and collectively accounted for almost one fifth of some issuers’ debt.

At the end of May the five funds accounted for 19 per cent of outstanding issuance from ingredients and food solutions firm Tate & Lyle, 19 per cent from Suez Environment and 17 per cent from Smiths Group, according to Bloomberg.

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The data also showed these funds owned 14 per cent of outstanding issuance from G4S, 13 per cent from BAE Systems, 13 per cent from Daily Mail and General Trust and 12 per cent from Marks and Spencer Group.

The figures come at a time of major concerns around dwindling bond market liquidity.

This has been driven in part by a fall in the number of specialised dealers as a result of more onerous regulatory requirements.

Andreas Michalitsianos, who manages the £129m JPMorgan Sterling Corporate Bond fund, said: “When we look at the investment rationale for a particular security, liquidity is very much in our minds when we weigh up whether to invest in a particular bond.

“If there is a period where markets are volatile and liquidity drops, you need to be confident you can hold those securities.

“You don’t want to be buffeted too much by market liquidity or volatility.”

Last month Yuliya Baranova, Louisa Chen and Nicholas Vause, from the Bank of England’s capital markets division, used the organisation’s Bank Underground blog to warn of nervousness in the market.

They said several indicators of market liquidity – including bid-ask spreads, price changes relative to trading volumes and price differences between frequently and infrequently traded securities – remained “healthy by historical standards”.

However, the economists warned that many market participants were concerned prices could move sharply under larger order flows.

“A particular concern is that dealers may have limited capacity to intermediate large sales of corporate bonds by asset managers, which could therefore generate sharp price falls,” they said.

“Assets under management of corporate bond funds have more than doubled since the 2008 financial crisis, and they may be vulnerable to a wave of redemptions if rising interest rates started to weigh on prices.

“Furthermore, dealers have cut their inventories of fixed income securities by more than 75 per cent during the same period, suggesting a significant withdrawal from market-making activity,” the economists added.