Bond liquidity alive if not kicking says Irish central banker

(Adds BoE's Brazier, Fidelity, BlackRock (Swiss: BLK.SW - news) )

By Huw Jones

LONDON, Feb 16 (Reuters) - Reports of the death of bond market liquidity may have been exaggerated, a senior Central Bank of Ireland (EUREX: 1269463.EX - news) official said on Tuesday in a riposte to bankers calling for an easing of regulations.

Policymakers have been scrutinising the ability of bond markets to absorb heavy selling in stressed times as they react to changes like shifts in interest rates.

"We can't draw any conclusions here about market liquidity that would lead us to thinking that we need to do something," Martin Moloney, head of markets policy at the Central Bank of Ireland (Other OTC: IRLD - news) , told an asset management conference in London.

Banks have blamed tougher regulation since the financial crisis on making it less profitable to hold inventories of bonds so that investors can buy or sell at all times.

Moloney said that bid-offer spreads, the difference between what a buyer is willing to pay for a security and the price sellers are willing to sell at, showed there was no problem with liquidity, although a fall in banks' bond inventories pointed to a potential difficulty.

With mixed messages from industry and the structure of bond markets changing, most regulators were sensibly drawing a "wait and see" conclusion, Moloney added.

However, the head of public policy at Fidelity Worldwide Investment said that tougher rules on banks should be revisited.

"There has been a gradual falling off in liquidity, it's manageable," Philip Warland said.

Moloney said a focus for regulators was how asset managers could deal with investors asking for their money back en masse.

THINK SYSTEMIC

Mainstream funds in the European Union come under the bloc's "UCITS" law, allowing regulators to suspend redemptions in exceptional circumstances to maintain financial stability.

"A lot of regulatory work relies on that fact and seeks to promote the effective use of that option," Moloney added.

Alex Brazier, executive director for financial stability strategy at the Bank of England, said there was a need to look at how asset managers could handle the risk of "complete market dysfunction".

This could be done by stress testing the funds sector as a whole to see how it could cope with falling bond prices and heavy redemptions feeding off each other, Brazier said.

"The thing we need to see from the funds industry, rather than us imposing it, is this greater sense of the systemic in their liquidity management," Brazier said.

Earlier this week, fund manager BlackRock (NYSE: BLK - news) questioned the usefulness of a system-wide test, and Moloney doubted that asset managers had the right data to do so.

Brazier said regulators are thinking about how to clarify and expand existing "tools" for dealing with redemptions, not just at times of stressed markets.

Many firms were offering the same redemption possibilities for more thinly traded high-yield corporate bonds as they did for more heavily traded shares, Brazier said. (Editing by David Goodman and Alexander Smith)