Bank of Canada Warns of Liquidity Risk in Corporate Bonds
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The Bank of Canada warned that investors in the nation’s corporate bond market may be underestimating the difficulty of selling the securities in a market downturn, putting them at risk of greater losses.
Rising holdings of corporate bonds in mutual and exchange-traded funds could exacerbate price swings if the funds are forced to sell in a rout, the central bank said in its semi-annual Financial System Review. Some market participants also “believe” dealers are reducing market-making activity, or acting as the middleman between trades, which may make it harder to unwind large positions, the bank said.