The importance of broker/dealers in providing liquidity to the US fixed-income markets has diminished under the pressure of more restrictive regulations, prompting asset managers to react by holding more cash and large liquid issues, according to a Fitch Ratings survey.
Like asset managers, insurance companies are also adding to their holdings of fixed-income securities, along with pension funds, and this shift in ownership, said Fitch, may help to stabilise bond prices in a future stress situation while offsetting the pullback by broker/dealers and the growing role of asset managers.
Since year-end 2007, reported Fitch, Federal Reserve data shows broker/dealer inventories down $250bn for corporate bonds and $32bn for municipal bonds, a 65% reduction in both cases. The Volcker Rule and Basel III are cited as the major contributors to these sharp declines.
Asset managers have stepped in to fill this void in a big way, and insurers have played an important part too, Fitch research shows. On the asset manager side, for example, ownership of corporate bonds by mutual funds has grown by $1,458bn, or 149%, since year-end 2007, and now represents 21% of total outstanding. Holdings of municipal bonds grew by $264bn, or 57%, since year-end 2007, and now represent 20% of total outstanding.
Over the same period, insurance companies added $533bn of corporate bonds and $61bn of municipal bonds to their portfolios (increases of 25% and 15%, respectively). Similarly, pension funds added $326bn of corporate bonds.
