Tuesday 17 January 2017 by Opinion

Liquidity – Take a drink when you can, not when you are forced

Bond market liquidity is only temporary and is usually abundant when it is not needed, but it can evaporate rapidly when investors need to sell

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Let me be upfront: in the next few months I do not see a major correction to credit markets.  I’m sure there will be continued volatility – look no further than the future President of the United States of America – but credit fundamentals are unlikely to deteriorate materially.

With that said, bond market liquidity can change quickly and often reflects investor sentiment.  It was only this time last year that bond investors were screaming about the lack of liquidity in global financial markets as the US high yield energy sector went into a tail spin.

At the moment, there is an abundance of liquidity due to a number of factors – lack of supply, plenty of redemptions, already high cash balances – so now may be an opportune time to take advantage of this situation and sell bonds at what could be attractive prices.

In Australia, there is no doubt that January and to a lesser extent February are seasonally quiet times for new corporate bond issuance, and I expect that we will see primary markets reopen soon.  This will relieve some of the pent up demand that exists.  Further, when these new bonds are issued, it is typical to see some switch activity out of existing bonds as investors make space for the new bonds in their portfolios. 

In summary, if you are looking to raise capital over the next few months, now could be a good time to realise attractive prices on some of your bonds.  Liquidity is abundant, bonds are scarce and as a result bond prices are higher than they may be in a more balanced supply versus demand market.

For those clients looking to take advantage of this imbalance, these are some examples of the bonds that we can currently bid on:

  • SCT-7.65%-24Jun21
  • AAT-7.50%-13Nov20
  • CML-BBSW+5.40%-18May20c
Please contact your local dealer if you are interested.