Euroclear ploughs wave through bond liquidity problem

Looking glassEuroclear, a market infrastructure provider, claims an industry first with a product designed to ease the search for bond liquidity, which has been harder to spot following years of quantitative easing and tighter bank solvency rules.

The Brussels-based international central securities depositary, Euroclear is utilising its vast data bank about fixed income settlements to bring transparency to the bond market, where supply is far outstripped by forced buying due to the twin causes of monetary policy and bank regulation.

The firm has worked with Paris-based Lyxor Asset Management to develop e-Data Liquidity and says it is the first time Euroclear is directly marketing to buy-side firms, such as fund managers, with a product.

With 65% of Eurobonds and 50% of Europe’s domestic bond market settled through its infrastructure, Euroclear says the transparency that making its raw data available will provide is unprecedented in the decentralised, over-the-counter fixed income market.

Jean Sayegh, co-head of sovereign bonds investment at Lyxor, said previous methods of obtaining liquidity information were less adequate. For example, data from banks would reflect their inventory, which might be tilted towards certain sovereign issuers, or towards private sector issuers.

Other methods might involve interpretations by data providers, but Euroclear says its raw data will allow users to make up their own minds.

Sayegh also highlighted that bid-offer spreads, a common liquidity signal in mainstream assets such as bonds, have to some extent failed as a proxy for bond liquidity due to forced buying in the market serving to distort the intrinsic liquidity premium of a bond.

Greater ECB policy-buying of bonds along with regulators attempting to increase financial stability by forcing banks to hold more fixed income assets is behind the liquidity issue. Sayegh said net new issuance of bonds is around €500 billion, while the asset purchases of the European Central Bank alone are roughly €960 billion.

“[e-Data Liquidty] helps to identify the liquidity premium better so you know which part of the return comes from that, as opposed to just the credit risk,” said Sayegh.

Stephan Pouyat, global head of funds and capital markets at Euroclear, said Euroclear cannot claim that the data offers a fully comprehensive picture of the bond market, but that the 40,000 ISINs with the highest turnover in Euroclear’s books that are currently tracked will be expanded as the product, which took two years to develop, evolves.

He likened the collaboration between Lyxor and Euroclear to doctors working with engineers to create bio-technology, and added: “It is the first time a post-trade infrastructure is sitting down with a buy-side player to design such an innovative concept.”

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