Fears that bond markets could become more volatile as a result of reduced liquidity levels in the asset class are continuing to dominate investor conversations in 2017.
In an update on liquidity in the UK corporate bond market in February, the Financial Conduct Authority admitted new evidence did indeed suggest that market participants may have to work harder today to complete a trade than in previous years, with the large increase in corporate bond issuance; the effects of monetary policy and QE as well as technological advances all having an impact on liquidity levels.
While liquidity is a key concern in any market condition, at Fidelity we take a number of measures to manage it in our funds.
First, we ensure that each portfolio has a bucket of highly liquid assets such as government bonds and cash. This helps to protect us from ever being a forced seller in the market and we can offset the unwanted cash drag by using highly liquid derivatives or higher beta holdings.
Second, we place huge emphasis on ensuring a robust process for transacting in the market. In practice, this means that we explore all avenues of trading, both electronic and traditional over the counter, and have specialist traders to identify the best pockets of liquidity. Part of this includes ensuring we are being sufficiently rewarded for the liquidity profile of every bond we buy. Having our traders seated side-by-side with portfolio managers helps to ensure that liquidity is front and centre of all investment decisions affecting a portfolio.
Finally, we have various oversight procedures to monitor and assess liquidity of each portfolio. This includes assessing the liquidity of bonds held by analysing their bid-offer spreads and historic trading volumes, as well as monitoring concentration risk within the portfolios. These oversight procedures act as an early warning signal on where liquidity risks are most prevalent.
For more information, please visit fidelity.co.uk/professional or call us on 0800 368 1732
This is for Investment Professionals only, and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up so investors may get back less than they invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The price of bonds is influenced by movements in interest rates, changes in the credit rating of bond issuers, and other factors such as inflation and market dynamics. In general, as interest rates rise the price of a bond will fall. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may, therefore, vary between different government issuers as well as between different corporate issuers. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, their logos and F symbol are trademarks of FIL Limited. UKM0317/18965/SSO/na
