- Funds hold only a small part of $39 trillion debt securities
- Debt investors have different objectives, priorities
Concern that funds could trigger the next financial crisis if mass redemptions force them to dump bonds at once are based on unjustified conclusions regulators have drawn from a subset of the market, BlackRock Inc. said in a study of bond-market liquidity.
Open-end mutual funds hold about $5 trillion of the $39 trillion of debt securities outstanding, the world’s biggest asset manager said, citing data compiled by the Federal Reserve. The rest is owned by various investor classes with diverse objectives and priorities, and some of them would step in to buy “high quality” bonds if prices fell in a sell-off, according to the paper, written by BlackRock executives led by Vice Chairman Barbara Novick.
Asset managers are pushing back against regulators’ scrutiny of their ability to withstand a sell off in today’s less-liquid financial markets. The industry is concerned capital requirements may be imposed, pushing up costs, and argues that it has been able to find new sources of liquidity, reducing the danger.
“Market risk is not the same as systemic risk and, in fact, some amount of market volatility is normal and welcomed by investors,” according to the paper. “Mutual fund share prices are expected to fluctuate. Investors knowingly bear this risk.”
Organizations that have expressed concern about the fallout from the reduced liquidity in the bond market include the International Monetary Fund and the Bank for International Settlements. Bank of England Governor Mark Carney has said that asset managers may be too optimistic about their ability to unwind positions in corporate bonds during a period of market turmoil.
Unlike banks, funds don’t have an obligation to meet liabilities such as the repayment of deposits. Bank deposits are insured by taxpayers while the prices of shares in mutual funds vary and there is no guarantee of a particular price, the authors argue. On top of that, in the absence of leverage it would be difficult for market losses to become a systemic threat.
Instead of wielding the rule book and imposing onerous new requirements, regulators should look at the structure of the fixed-income market in the context of the rules they have already issued, BlackRock said. They should also update rules to ensure that methods of managing large-scale redemptions and other crises are made available to all, while stress testing should be limited to individual funds, the authors said.