The gyrations that wiped out this year’s bond-market gains are banal, or even benign. That’s the conclusion you’d draw from listening to the people who drum up funding for euro-area governments.
No fewer than eight debt managers from across the region took turns on Tuesday to tell a Euromoney conference there was no cause for concern. Germany’s said volatility has been higher than today’s levels in recent history, France’s described the selloff as healthy and Portugal’s cautioned against reading too much into the moves.
Investors who lend to governments by buying sovereign debt may disagree. They depend on price signals to value their holdings and count on being able to trade the securities without having prices move sharply against them. Amid the selloff this month, yields on German 10-year bunds, the region’s benchmark securities, had their biggest two-day jump since at least 1999. While traders say regulations and market structure dried up market liquidity, the debt heads are urging calm.
“That sounds a bit complacent, and I disagree,” said Grant Peterkin, a money manager at Lombard Odier Investment Managers, which oversees $172 billion. “There is no denying regulations have made liquidity worse. As investors, we are affected. The problem is no longer confined to corporate bonds. You feel the impact on sovereign markets as well.”
Peterkin said he increased the use of derivatives to mitigate liquidity risk in the cash-bond market. He is not alone -- investors including BlackRock Inc, Pioneer Investment Management and BlueBay Asset Management have also said they turned to more derivatives or exchange-traded assets to implement their investment view.
There’s little evidence that the bond market is less liquid or being distorted, at least not in Germany, that nation’s debt chief, Tammo Diemer, said in an interview at the conference in London.
“If you look at the German bond curve, there are no particular bonds that are out of line with others,” he said. “This probably suggests there is no price distortion. What we have seen is intraday volatility. But that doesn’t mean supply doesn’t meet demand at the end of the day or the week.”
At least France’s Anthony Requin recognized the bondholders’ concerns.
“Clearly, liquidity is a point of interest for investors,” he said. “It’s hard to substantiate the feeling that liquidity is more scarce, and it’s too early to conclude that the increased volatility we’ve seen is a new normal.”
The world’s biggest banks are scaling back their bond-trading activities to comply with higher capital requirements imposed by Basel III, which went into effect this year. Adding to the slowdown in trading is central banks’ quantitative-easing programs, which suck liquidity from the market via their debt purchases.
In Spain, a slump in repurchase agreements and the trading of bills sent government-debt turnover in April to the lowest since at least 2012.
Derivatives were also affected. A trader could have traded around 100 futures contracts for 30-year bunds without moving markets much at the beginning of 2014, and the figure fell to below 20 in May, according to JPMorgan Chase & Co.
On Wednesday, the head of the U.K. Debt Management Office took a more accepting approach. “Liquidity seems to be less present, less available for us debt managers,” Robert Stheeman said at the conference. “This begs the question: what do we do about this?”