Liquidity in European Corporate Bonds Evaporates as Crisis Bites

Investors are concerned about a lack of liquidity in Europe’s corporate bond market as banks cut back on trading and fund managers hold on to securities for longer.

Two-thirds of participants in a Fitch Ratings survey published today reported reduced corporate bond liquidity since the start of the euro crisis. The same is true in the U.S., where trading volumes averaged $9.97 billion last month, 8 percent lower than in July 2011, according to data from the Financial Industry Regulatory Authority.

“It’s something that’s not going away and if it’s already taking place in the U.S., where the market’s much more liquid and mature than Europe, then we’re in trouble,” said Adriaan Klop, a fund manager at Bryan Garnier Asset Management Ltd. in Paris.

Buying and selling activity in Europe’s corporate bond market has declined as banks deleverage because of the continent’s debt woes and investors hold onto bonds they’ve bought for longer, even amid a 42 percent jump in issuance this year compared with the same period of 2011. A knock-on effect is an increase in spread volatility, fund managers overseeing about $7.2 trillion of fixed-income assets told Fitch for its third- quarter survey.

Companies sold 137.6 billion euros of bonds in the common currency and pounds so far this year, up from 97 billion euros last year and the most for any equivalent period since 2009, according to data compiled by Bloomberg.

A total of 41 percent of respondents to Fitch’s survey said a lack of liquidity is making trading more complicated and time consuming, while 20 percent said it reduced their interest in sub-benchmark sized bond issues.

To contact the reporter on this story: Tom Freke in London at tfreke@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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