A proposal by the Swedish central bank to address liquidity shortages in the country’s corporate bond market has been met with disbelief by a number of asset managers.
The Riksbank last week reiterated its call to improve the functioning of the market but added a new demand: to revise the regulatory framework so that corporate bond funds “cannot offer daily redemptions”, according to its financial stability report.
But given that the majority of fund investors are regulated by UCITS – and therefore aimed at individuals and small investors – such a measure risks making matters worse, according to some market participants.
Maria Ljungqvist, director at Aktie Ansvar in Stockholm, warns that a withdrawal ban would be “a radical step” and says ” feels as the Riksbank wants to go backward. Rather, I prefer measures that contribute to market development. “
Other managers such as Fredrik Tauson of Nordic Cross say that a blanket ban would be too heavy. “It would be a mistake to put all corporate bond funds under one roof because the cash management strategy differs from fund to fund,” Tauson said.
He highlights the differences in credit quality to illustrate this point. “In general, the liquidity of small, high-yield issuers can dry up fairly quickly, while the market for large, good quality issuers is much more liquid.”
Sweden has struggled to close liquidity gaps in its credit market since panic among small investors led to the closure of more than 30 bond funds at the height of the Covid crisis last year. The financial regulator then asked the sector to come up with its own solutions to improve liquidity and transparency.
“Important and urgent”
The last solution the industry focused on was an aggregated daily report of executed bond trades. But it is a model that has been ridiculed by some market participants for failing to address the underlying liquidity issues. The FSA has since said it plans to revisit the matter next month.
Riksbank Governor Stefan Ingves told Bloomberg it was “important and urgent” for investors to understand the illiquid nature of these funds, calling it a “consumer law problem.”
The Riksbank’s proposal found support in some corners of the market. Alexander Onica of Skandia Investment Management says the responsibility for making the market work ultimately rests with the fund managers.
“A fund that buys any credit and calls it a liquidity fund with daily transactions is problematic,” Onica said.
But for a central bank trying to bring corporate borrowing costs under control with an unprecedented quantitative easing program, the ban on daily withdrawals could have a major unintended consequence.
“If we see investors withdrawing money from funds, the cost of funding will increase for issuers and therefore have a negative effect,” said Ivan Adzaip, a debt banker at Arctic Securities. “It’s too early to do it given where we are with the Covid situation.”