New Basel III regulation has a negative impact on bond market liquidity and cost in a market where investor confidence remains low, Tyndall Asset Management (Tyndall AM) said.
The new regulations means less-credit worthy borrowers are being pushed out of the market and as a result, the level of deleveraging in the consumer markets is increasing, Tyndall AM head of portfolio management Darren Langer said.
Langer said new regulations are impacting the market because it is causing less liquidity and less securities are likely to trade.
“I think that’s the main thing to take out of this legislation is that its ultimately an impost on liquidity and cost rather than necessarily always being purely just an investor protector mechanism,” he said.
“Investors are finding that banks are not able to offer the same sort of balance sheet support for various bond issues so there is not the same velocity of bonds changing hands so there probably needs to be more work done on how we’re going to exchange securities between each other.”
Langer explained that overall, legislation is lifting the cost of investing the bond market.
“The merits around the legislation in terms of better investor protection is another cost and that may be a positive cost but in general we find things will change the way we do things in the market because of that liquidity aspect,” he said.
Accompanying the impact on liquidity and cost in the bond market is poor investor confidence, Tyndall AM head of fixed income Roger Bridges said.
“Confidence here has dried up [but] I do believe that confidence will bounce back. [But] people are still deleveraging and the only reason why you do that is because you’re not confident,” Bridges said.
Bond market confidence continues to stay very low, and is likely to continue until confidence comes back, he said.
“I don’t know when that is going to happen. But there is enough being done to achieve bond rates that go back up again. But it’s likely we’ll still see these low levels because of this deleveraging and lack of confidence,” he said.
