Some Investors Unfazed by Bond Illiquidity

Terry Flanagan

Nicholas Gartside, international chief investment officer of global fixed income, currency & commodities at JP Morgan Asset Management said long-term investors can use the lower liquidity in bond markets to their own advantage.

Liquidity has fallen in the corporate bond market since the financial crisis as banks have faced increased capital constraints which have decreased their ability to make markets.

Gartside said at the Morningstar UK Investment Conference in London on Wednesday that investors can use the lower liquidity to their own advantage.

“Illiquidity is a problem for day traders but long-term investors are more relaxed,” Gartside added. “We have never had an issue buying and selling bonds.”

Many new corporate bond trading platforms have been launched make it easier for asset managers to trade large blocks. A report this year from consultancy GreySpark said there are already at least 33 live electronic corporate bonds trading platforms, and at least another eight are in various stages of pre-launch development. “The majority of the new trading platforms discussed in this report will no longer be trading in three years time,” added Greyspark.

Gartside said JP Morgan Asset Management does not currently favour government bonds but believes there are opportunities in the high-yield market, particularly in Europe.

“There will be buying opportunities in government bonds in the next 18 months but yields are currently too low,” he added.

JP Morgan Asset Management believes the US Federal Reserve will begin to raise interest rates in September and then increase rates at every other meeting in line with inflation. The Bank of England is expected to start raising rates six months behind the US.

Gartside said he does not expect the 2% default rate in high-yield to increase as most debt maturities have been pushed out to 2020 and two-thirds of new issuance is being used to repay existing debt. As a result, some high-yield returns could be close to 10% through a combination of income and capital gains.

He was also positive on European banks, especially Tier 1 bonds and additional Tier 1 bonds, which are lower down the capital structure. European banks are deleveraging and being forced to raise capital due to aggressive regulation.

“There is life in the old bond dog yet. However not all bonds are created equal and investors are increasingly moving away from country or sector-style investing,” added Gartside.

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