The FSA has written to fund houses requesting reports on whether their corporate bond funds could meet redemption demands, amid liquidity concerns in the fixed income market.

The regulator has given groups until 16 July to give feedback on the liquidity of their funds as it is concerned liquidity in the market is too low, Investment Week understands.

Bond funds have seen significant inflows over the past few years as investors shun equities in search of lower risk options.

The IMA has reported the Corporate Bond sector has been the best selling sector for 10 out of the last 12 months. Richard Woolnough's M&G Optimal Income fund saw inflows of £1.8bn in the first six months of this year alone, causing assets under management to swell to £7.7bn.

At the same time, liquidity in the investment grade corporate bond market is reported to have fallen 80% since 2007.

Net new issuance has fallen dramatically, in the last two years there has been net new issuance of zero or even negative.

A number of factors have been blamed such as the market is rewarding corporates which pay a dividend. In order for companies to have a strong dividend policy, companies need a sustainable balance sheet that is not leveraged or issuing debt.

These concerns have not been missed by the FSA, which also said in the letter to groups that liquidity could be impacted further on a global scale in the future.

Back in 2009, the FSA carried out a similar process, seeking reassurance from groups that the funds could meet potential redemption demands.