Bond managers warn of forced selling risk as liquidity crisis grows

The deterioration of liquidity in bond markets has continued apace over the past year, leaving fund managers at risk of becoming forced sellers of bonds if there is a full-scale rotation out of the sector.

Investors have been dealing with a liquidity crisis for many months, but they are facing increasing problems from a lack of issuance to meet investor demand for fixed income, as well as an unwillingness to bet wholeheartedly against bonds by going short, forcing them into crowded trades. While some managers have responded by holding more liquid assets – having been prompted by the regulator to ensure they could cope with redemption demands a year ago – these bonds have been hit by recent market jitters, with yields on gilts last week hitting a 15-month high. Managers are concerned any...