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Mark Gilbert

Worried About Bond Liquidity? Blame the Regulators

The unintended consequence of tighter rules is reduced liquidity.
Can he trust those prices?

Can he trust those prices?

Photographer: Chris Ratcliffe

Bond market liquidity, as my colleague Matt Levine frequently notes, has a lot of investors worried. In a surprising twist to the debate, Britain's Treasury points a finger straight at European regulators for strangling the market. Her Majesty's Treasury is right.

The concern about bond liquidity has two key elements. One worry is over what might happen if there's a fire in the debt markets and everyone rushes for the door at once. With banks committing less capital to their trading arms, the doorway to get out of an investment becomes narrower. A second worry is that reduced activity and shrinking turnover means bond prices aren't reliable.