Bonds – Credit: less transactional liquidity post Basel III

In a post Basel III world where the banks are required to hold a higher level of regulatory capital it has become more expensive for banks to hold inventory on their balance sheets. This means there is likely to be less transactional liquidity than would otherwise be the case. However it is not clear if this is the full picture. It may also be the result of other factors including transaction costs or the demand for credit based assets has meant holders prefer to buy and hold rather than actively trade. That said liquidity is a fickle friend in that it’s there when you don't really need it, and it’s not there when you do. In periods of market stress liquidity in credit market tends to evaporate and the regulatory changes do not change that dynamic. The way we construct portfolios is to not be solely reliant on market available liquidity for individual bonds. Hence the amount of cash held, the maturity profile of the portfolio and, the quality of the security are all important portfolio construction decisions. (VIEW LINK)

Established in 1961, Schroders in Australia is a wholly owned subsidiary of UK-listed Schroders plc. Based in Sydney, the business manages assets for institutional and wholesale clients across Australian equities, fixed income and multi-asset and...

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