Liquidity drought may be easing in Europe's corporate bond market

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Liquidity, or ease of trade, in bond markets took a hit in the aftermath of the UK’s vote to leave the European Union in June. But the following months have seen a steady recovery, IHS Markit said in a report on December 30.

Citing one bellwether metric – the number of euro-denominated bonds quoted by 20 or more dealers – the data firm described the drop throughout June as “precipitous”, with the number of bonds dwindling from 131 on June 6 to 20 by June 23, referendum day, and plunging to just five once the result was known.

It had recovered to 72 by June 28, and following the summer lull – during which the Bank of England announced its plan to purchase £10 billion of corporate bonds, a plan implemented in September – the number of high-liquidity bonds rose steadily to hit a new record high of 167 on October 11.

It fell back to a monthly average of around 100 a day by November, IHS Markit said, adding: “This recent data may indicate that the ECB’s and BoE’s bond purchase programs are in fact improving the liquidity of European corporates to some degree.”

Market-makers are still an “integral part” of bond markets, Markit said, even though dealer bond inventories have plummeted since the financial crisis. Boosting liquidity in bond markets has been the focus of several industry initiatives.

FN reported in November that Citigroup and Deutsche Bank had joined Project Neptune, an initiative backed by banks and investors who want to increase bond trading. Earlier that month, Euronext and technology provider Algomi said they would set up a regulated venue for trading European corporate bonds.

“Major periods of distress and declines in liquidity often coincide with a decline in the number of bonds quoted by several dealers,” the report said.

The ECB said on December 8 it would extend its quantitative easing programme to the end of 2017, though it will reduce its bond purchases from €80 billion a month to €60 billion a month in April 2017. Buying bonds was one of the measures unveiled by the Bank of England over the summer to help cushion the UK economy after the country’s Brexit vote.

However, quantitative easing has come under scrutiny. Hedge fund managers are worried (http://www.wsj.com/articles/hooked-on-qe-hedge-funds-see-dangerous-addiction-1481282839), while in the UK an influential group of lawmakers on December 22 announced an inquiry into the effectiveness of monetary policy since the financial crisis (http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news-parliament-2015/post-2008-uk-monetary-policy-launch-16-17/).

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