Addressing Bond Market Liquidity Concerns
Headline news for the past few years has been of an “impending liquidity crisis” once the next Federal Reserve tightening cycle begins. The Fed has now raised rates, and liquidity concerns have been magnified by the effective closing (late in the fourth quarter of 2015) of an open end mutual fund focused on areas like distressed debt. Do investors have reason to panic? In this special commentary on liquidity, we stress caution over panic, emphasizing that bouts of volatility with liquidity concerns have occurred numerous times in the past, and that challenging markets may create investment opportunities for value investors like us.
As a result of Dodd-Frank legislation, banks and their trading desks have lightened up their inventories to avoid “risky” assets and increased capital charges on their balance sheets, diminishing their ability to act as market makers and potentially affecting liquidity.
Bond market liquidity has not declined to the worrisome extent that the media portrays. In fact, some industry findings report evidence contrary to a panic situation.
A changing market environment for liquidity does exist and requires close attention. Newfleet has focused on liquidity for more than two decades, one of many factors used to assess the quality of an investment and the overall posture of portfolios.
Our multi-sector approach allows us to identify and respond promptly to changes in the relative liquidity of sectors, while our diversification objective ensures a large opportunity set from which to achieve liquidity in various market environments.