The International Capital Market Association (Icma) has published a study based on the views of investors, traders, issuers and intermediaries that identifies the main causes of the potential crisis facing liquidity in the corporate secondary bond markets in Europe.

The Icma observed that commentators and market participants are expressing increasing concerns that the secondary markets for European bonds have become critically impaired and are no longer able to function effectively. 

‘This phenomenon has been widely attributed to the unintended consequences of banking regulation and extraordinary monetary policy,’ stated the report. ‘There are broader concerns about increased market volatility, frozen capital markets, risks to economic growth and another financial crisis.’

The study outlines the current state of the European investment grade corporate bond market (including financial and non-financial corporates) and calls for constructive and coordinated action from all market stakeholders to find solutions.

It found that there are arguments to suggest that the levels of market depth and liquidity experienced between 2002 and 2007 were largely the result of banks mispricing balance sheet and risk and overtrading in cash bonds being driven by the credit default swap and structured product markets.

‘Intermediaries (chiefly banks and broker-dealers), are responding by changing their models. As a result of more active capital allocation within the banks, there is a shift to holding smaller quantities of bonds in inventory, but seeking to increase turnover through smarter, more active trading on an agency basis,’ stated the report.

Other findings were that there is a high level of concern from both intermediaries and investors regarding new regulation including a suspicion that regulation confuses transparency and liquidity and that greater utilisation of e-commerce and e-trading, more developed cross-market connectivity and changes in issuance practice cannot replace the role of market-making nor compensate for unhelpful regulation.