Billions of pounds invested by pension funds, City institutions and retail investors could be hit by a looming “armageddon” in the bond markets, it has emerged.
Experts have warned that a bubble is building in the £250 billion corporate bond sector, which has become a popular way to invest in recent months because it offers safer returns than traditional products.
According to industry figures, 40% of assets in the market are owned by just five large funds and 30% 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, was raised by Old Mutual Global Investors in a note to clients.
Stewart Cowley, the head of fixed income at the fund manager, warned of a “liquidity crisis”. He said rival M&G had asked advisers to stop directing money into its corporate bond funds, while Invesco has said it needs to keep £750 million in cash and short-term securities as a liquidity buffer.
Talk of a bond crisis will make grim reading for UK pension funds, which now have more money invested in bonds than in shares.
