Billions of pounds at risk in corporate bond bubble crisis

Experts warn of liquidity problems in the popular £250bn sector

Billions of pounds invested by pension funds, City institutions and retail investors could be hit by a looming "armageddon" in the bond markets, it emerged yesterday.

Experts warned that a bubble is building in the £250bn corporate bond sector, which has become a popular way to invest because it offers safer returns than most traditional savings and investment products.

According to industry figures, 40 per cent of assets in the market are owned by five large funds and 30 per cent by the three largest. Fears have been raised that these funds could struggle to meet investors' demands to withdraw money because of illiquidity in the market.

The issue, which is being looked at by the Financial Services Authority, has been raised by Old Mutual Global Investors in a note to clients seen by The Independent.

Stewart Cowley, head of fixed income at the fund manager, warned of "liquidity crisis" in the market. He said rival M&G has asked advisers to stop putting money in its corporate bond funds, while Invesco has said it needs to keep £750m in cash and short-term securities as a liquidity buffer.

"Let's look at a hypothetical situation such as the FSA might be concerned about, for example, if a manager at one of the mega-funds was to retire and a proportion of the investors in the fund wished to redeem their positions until a new manager had settled in," he said. "Let's suppose the effect was a modest run of redemptions equal to 5 per cent of the fund. In a fund of £6bn, that is £300m. This would be extremely difficult to liquidate in a market which trades in parcels of £1m-£2m, and where the counterparties are your direct competitors."

One City source said the large inflows for these "mega-funds" meant the quality of bonds being bought could also be hit. In order to soak up their cash flows, mega-funds managers need to buy most of the bonds available, not just the best-value bonds.

Simon Evan-Cook, investment manager at Premier Asset Management, added: "Getting caught in an illiquid asset class when the herd decides it's time to bail out could incur permanent losses for investors. It's crucial to avoid funds that have grown too big for their asset class, as they can leave you low and dry."

Talk of a corporate bond crisis is likely to make grim reading for UK pension funds, which have seen their deficits widen in recent years. Earlier this month, figures from the Pensions Regulator and Pension Protection Fund showed that pension schemes now have more of their money invested in bonds than in shares.

Pension funds now have 43.2 per cent in government and company bonds, compared with 38.5 per cent of their money in shares. One year ago, the balance was tipped the other way, with investments in shares at 41.1 per cent compared with 40.1 per cent in bonds.

Roger Mattingly, president of the Society of Pension Consultants, said: "Given their size, pension funds would be amongst those hardest hit if the risk of a destabilised bond market was realised.

"Managing liabilities and risk is the challenge facing every pension fund and these are inextricably linked.

"In their efforts to manage their liabilities, investors need to make sure that they take into account all the risks, some of which are not always immediately apparent and some of which can even be created by trying to do the right thing."

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
News
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
TV
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
life
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
News
Amazon misled consumers about subscription fees, the ASA has ruled
news
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn