Report blames new regulation for trading slump in bond markets

The study, which was commissioned by the Global Financial Markets Association and the Institute of International Finance and put together by Pricewaterhouse Coopers (PwC), finds that the sharp downturn in bond trading is due to new banking industry regulations. 

The viewpoint of the report maintains the momentum of this year's hot debate concerning the liquidity of the global debt markets. A key talking point of the industry this year, experts fear that it could exacerbate a financial crisis.  

Despite the presence of mutual funds and exchange-traded funds which guarantee an immediate sell to investors, bonds have become more difficult to buy and sell in recent years.

Should they be hit by major losses, retail investors could take their money out of funds whose securities are increasingly illiquid, prompting an increased sell-off and further facilitating outflows. This climate coincides with a potentially uncomfortable time for the markets; the US Federal Reserve could lift interest rates as early as September. 

Banks that are less prone to take risks have played their part in the liquidity crunch, according to the PwC report. It also interpreted the new net of regulations cast onto banks in the immediate aftermath of the financial crisis as a source of restriction, which impinged upon the banks capacity as market makers, further fuelling the trading downturn. 

Among other recommendations, the report calls for improved market data and analysis, further investigation into the relationship between liquidity and regulations and better synchronisation across the global regulatory field. It advises easing on policies that "may not add significantly to financial stability, but are detrimental to financial markets' liquidity."