AllianceBernstein chief investment officer and head of fixed income Douglas Peebles said liquidity has become a much “greater risk” in today’s fixed income market due to there being a “lot less of it”.
“Stricter regulations that require banks to hold more capital against losses have prodded them into slashing inventories of assets such as corporate bonds. This leaves the banks unable to play the part of willing buyer when investors want to sell,” Mr Peebles said.
Despite the “challenge” liquidity presents for investors, it is still manageable and can offer “attractive opportunities given the right time horizon”, he said.
“When liquidity dries up in one sector, it can be plentiful in another. If managed properly, it can be an additional source of returns,” Mr Peebles said.
He highlighted a series of points relevant to helping investors to “stay afloat” in low liquidity markets, including the need for investors to “broaden [their] horizons” with a multi-sector mindset.
“Liquidity is episodic and can affect different sectors in different ways. Consequently, segregating one’s allocations into single-sector funds—high yield, emerging markets and so on—can be dangerous,” Mr Peebles said.
“Liquidity dries up in one sector, investors can quickly find themselves trapped. In our view, a holistic and dynamic multi-sector approach that lets investors tap into a broad universe of fixed-income assets offers better protection should liquidity in a specific sector dry up,” he said.
