Over the past few weeks, we have observed a decline in liquidity across government bond and credit markets. While the volume of transactions has increased, the proportion of trades at different price levels has been lower, which has contributed to higher intra-day trading ranges.
In particular, the Australian government bond market has become very dysfunctional with securities consistently trading with bid/offer spreads of 0.20% while semi-government and supranational securities are trading with spreads of circa 0.25% to 0.40%. In credit markets, the volume of securities transacted has reduced significantly as banks continue to quote punitive bid/offer spreads, and asset managers wait for market conditions to stabilise.
While the RBA’s announcement on 19 March regarding the commencement of its ‘quantitative easing’ program, should improve the functioning of bond markets in the near term, the current liquidity environment has resulted in material increases in buy/sell spreads across our Australian and global fixed interest categories. Such increases have been in the range of 0.2% and 2%, depending on the nature of the sub-asset class and strategy.
Given the low yielding environment, in some instances, current sell spreads are almost equal to 12 months of running yield on a traditional fixed interest portfolio. While these spreads are retained by the trust and applied to ensure that all investors are treated equally (i.e. transaction costs are borne by the redeeming (or entering) investor), they should be an important consideration with respect to redeeming or switching managers/investment strategies.
We encourage all advisers to reconfirm the buy/sell spread on each fixed interest fund prior to making a buy/sell decision. Moreover, spreads can change on a daily basis, so it’s important to check the current level prior to issuing instructions. As markets stabilise, we should observe spreads reverting to historical levels, however, this may occur over several months.