Bond Market Liquidity – The Next Market concern?

When rates start to rise what will happen to the bond mutual funds? Could the lack of liquidity in bond markets and a market structure of requiring a broker to execute trades lead to a liquidity crisis?

There is a difference between owning individual bonds and owning a bond mutual fund.

When it comes time to sell, it can
be hard to find a buyer, and vice versa. PIMCOs
chief investment officer for U.S. core strategies, Scott
Mather, has compared the bond market to that for real estate. Few people list their houses on a website and expect to find a buyer. Instead, they pay an agent, who may
know a young couple interested in a fixer-upper next to the
railroad tracks. Both bonds and houses are far from
homogeneous. Real estate brokers have maintained their grip on
their market, despite consumers buying everything from
groceries to puppies online. “You can’t force every
house to be the same or force every issuer to issue the same
bond,” says Mather. Since the financial crisis, though,
players in the bond market have become more receptive to
technology and new solutions. They’ve had to as banks have
been regulated out of playing their traditional role as market
makers and, in a pinch, providers of liquidity.

Source: On Liquidity Anxieties and a New Bond Market

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