LONDON(Reuters) – Italy’s recent bond market shock and pricing lurch was at least partly a function of years of attrition in global bond trading — and it may be a precursor to bigger debt market bust-ups, according to investors.
Liquidity – the ease with which assets can be bought or sold without moving the price sharply – has fallen across bond markets over the past decade.
Reason - Change - Repeat - Banking - Collapses
One reason is regulatory change introduced to prevent a repeat of 2008’s serial banking collapses. Another is intervention by major central banks through quantitative easing (QE)– massive bond-buying programs.
A big concern for years has been that another major world market hiatus would once again expose the vulnerability at the financial system’s core, amplifying any global selloff.
Liquidity - Hiccups - Bonds - Years - Italy
Liquidity hiccups have already roiled emerging and junk-rated bonds in recent years. But Italy’s upheaval at the end of May showed that parts of the vast, historically stable market for Western sovereign bonds has also become prone to seizure whenever turbulence strikes.
“What happened in Italy should teach portfolio managers that liquidity comes at a price,” Arnaud-Guilhem Lamy, a fund manager at BNP Paribas, said.
Euro - Government - Bond - Trading - Volumes
Euro zone government bond trading volumes have nearly halved in the past four years to 676 billion euros in June, from 1.29 trillion euros in June 2014, data from Trax, a unit of bond trading platform MarketAxess, showed.
Meanwhile, the bid-offer spread — the difference between prices investors quote to buy and sell, a common liquidity gauge — remains low but has widened. Even for Germany’s 10-year Bund, the region’s most-traded bond, bid-offer levels on cash prices are now 15 to 30 cents, compared with 5 to 10 cents from 2013 to 2015.
Slide - Central - Bank - Scheme - Chunk
Some of that slide was caused by the European Central Bank. Its 2.6 trillion-euro bond-buying scheme has swallowed a big chunk of new supply since 2015.
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