On 6 April 2022, the International Organisation of Securities Commissions (IOSCO) published a report, Corporate bond markets – drivers of liquidity during COVID-19 induced market stresses.
The report analyses the work of the IOSCO working group on corporate bond market liquidity, which was tasked with analysing the corporate bond market microstructure, resilience and liquidity provision during the COVID-19 induced market stresses of March 2020 and subsequent months.
Key outcomes from this work include:
- Corporate bond markets have grown significantly, including on a cross-border basis, over the past decade, with new issuance volume almost tripling in certain jurisdictions.
- Corporate bond markets are less liquid than some other traded markets and the number of individual corporate debt securities that trade regularly is small.
- Primary markets are important to the overall market liquidity.
- Overall, the broader corporate bond market showed reduced liquidity during the turmoil.
- It is difficult to assess whether corporate bond market liquidity primarily dried-up because of reduced liquidity supply by dealers, increased liquidity demand by investors, or a combination of both – and what was the greater relative contributor to the stresses.
- On the demand side, evidence on the influence of long-term investors in corporate bond markets during the COVID-19 stress is mixed, in part because their behaviour varies considerably by jurisdiction, in part due to the nature of their investment strategies, and in part due to the extraordinary speed of the crisis and subsequent recovery.
- Liquidity in open-ended funds (OEFs) during the COVID-19 induced market stresses of March 2020 showed that some OEFs contributed to selling pressure in some jurisdictions, driven by investor redemptions mostly related to the flight-to-quality and the dash-for cash.
- The structure of the corporate bond markets also contributed to the constraints in meeting demand for liquidity during the COVID-19 induced market stresses of March 2020.
The IOSCO invites comments on the report by 6 July 2022. Specifically, the IOSCO is interested in stakeholders’ feedback on possible ways to help improve market functioning and liquidity provision, such as assessing the feasibility, benefits and costs of mitigating shifts in liquidity demand and alleviating supply side market constraints, including the potential unintended consequences from any prospective market changes.