However, Mr Stone states that this is not the case and explains that liquidity is “near impossible to truly accurately measure,” and often the best indicators are anecdotal, such as conversations with managers and other market participants.
Mr Bennett explains that methods of measuring liquidity are available, but are not particularly useful. Banks, such as Barclays, have a liquidity cost score which measures the cost of buying and selling a bond.
However, he remains sceptical about such tools and hence opts for a different approach. He says: “This is not always static and accurate: if markets weaken significantly then liquidity generally dries up. Instead, we look at large bonds and bonds that have been recently issued as providing the most liquidity.”
Challenges ahead
In the face of these issues, it appears that further challenges could still lie ahead.
For both investors and managers, it may not be as simple as securing greater liquidity at the expense of higher yields. This is particularly true for managers, as although many investors understand that bonds are not designed to deliver the same spectacular returns as equities, solid growth is still expected.
Furthermore, the FCA has its sights firmly focused on the asset management industry and therefore further regulatory tightening could be on the horizon. The outcome of this could be mixed, according to Mr Bennett, who explains that a healthy market place is pivotal to bond liquidity.
He says: “Regulations that restrict new bond issuance or the ability of banks to hold bonds on their balance sheet or increase the cost of transacting bonds will all weigh on liquidity.
"That said, liquidity dries up when markets suffer significant weakness, so regulations are necessary to stop large stresses from building up and ultimately causing financial crises. It is a delicate balancing act that, at the moment, is probably fairly weighted.”
With regards to countering the potential liquidity crisis, technological advances are key according to Mr Trindade, who concurs with Mr Bennett that the regulatory situation should be addressed.
Mr Trindade says: “When Mifid II is introduced, the increase in reporting requirements could hinder dealers’ willingness to take on risk and provide liquidity to the market.
"In this context, the development of new technologies is very important. Peer to peer platforms, for example, offer a great opportunity to improve liquidity in the future,” Mr Trindade concludes.
Craig Rickman is a writer for Money Management
