Bond managers struggle with liquidity risk

The withdrawal of investment banks as secondary fixed income market-makers combined with thin bond trading has stoked fears of a market seizure in the event of a credit or rate shock. As a result of regulatory changes designed to make banks safer, the broker-dealer arms of the major financial institutions have been forced to increase reserves, reduce risk and get out of a variety of trading activities. The result: markedly reduced inventories of fixed-income securities. “The liq…