The International Capital Market Association (ICMA) has today issued the third in a series of studies on the state and evolution of the secondary European investment grade bond market.

Based on quantitative data from the market and on interviews with both sell-side and buy-side firms the study looks at the current state of market liquidity; the evolution of market structure; and participants' expectations for future developments in the market.The European investment grade corporate bond market, i.e. publicly issued bonds by non-financial and financial corporate entities that are incorporated in the European Economic Area (EEA), and issued in an EEA currency, is worth in excess of EUR3.6 trillion in terms of nominal amounts outstanding.

Martin Scheck, ICMA Chief Executive said: "This research paints a picture of a market where liquidity conditions remain challenging in certain segments and where radical structural change driven by technology and automation is taking place.

"As Europe's corporate bond markets are an essential source of funding for companies and economic growth, it is vital that this market remains competitive and continues to develop."

The surveys and interviews suggest that, overall, secondary market liquidity has continued to deteriorate since the previous study in 2016, with sell-side firms observing the decline more acutely. This is largely attributed to the capacity of dealers to provide liquidity becoming ever more constrained by increasing regulatory capital and liquidity costs, as well as by the state of the credit funding and hedging markets.

At the same time, market structure is evolving rapidly, with asset managers looking to new approaches for sourcing liquidity, either becoming more sophisticated in their interaction with market-makers, or through diversifying their use of trading venues and protocols. Participants report that the use of trading venues and e-trading protocols to execute trades has continued to increase over the past years.

The most significant trend since the last study is the increased reliance on automation in the trading process, both for buy-side and sell-side. Sophisticated ‘rules-based', or even algorithmic, automated processes to manage and direct orders to venues or counterparts are commonplace in equity markets and have been widely used by asset managers for many years. As technology becomes more advanced, their adoption in the fixed income space has become more prevalent, initially in the sovereign bond segment, but increasingly, in IG credit.

Another notable development is the accelerating growth of the European corporate bond ETF market, which brings with it new flows in the underlying bond market, as well as new players.

Looking to the future, the study highlights the potential for data management, automation, and the introduction of new liquidity providers, particularly through the growth of the ETF market, as the major contributors to market development. Participants are already making significant investments in these areas.

Meanwhile, market and prudential regulation are cited as the biggest risks to market liquidity, in particular the anticipated increased capital costs which will be borne by market-makers with the introduction of more punitive capital requirements under the Fundamental Review of the Trading Book (FRTB), and the highly controversial Central Securities Depositories Regulation (CSDR) mandatory buy-in regime.

General macroeconomic and geopolitical uncertainties also feature high on the list of market concerns.

The study calls on market stakeholders, including regulators and policy makers, to act quickly to prevent further decline in liquidity, and to help foster the development of Europe's corporate bond market.

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The International Capital Market Association (ICMA) has today issued the third in a series of studies on the state and evolution of the secondary European investment grade bond market.

Based on quantitative data from the market and on interviews with both sell-side and buy-side firms the study looks at the current state of market liquidity; the evolution of market structure; and participants' expectations for future developments in the market.The European investment grade corporate bond market, i.e. publicly issued bonds by non-financial and financial corporate entities that are incorporated in the European Economic Area (EEA), and issued in an EEA currency, is worth in excess of EUR3.6 trillion in terms of nominal amounts outstanding.

Martin Scheck, ICMA Chief Executive said: "This research paints a picture of a market where liquidity conditions remain challenging in certain segments and where radical structural change driven by technology and automation is taking place.

"As Europe's corporate bond markets are an essential source of funding for companies and economic growth, it is vital that this market remains competitive and continues to develop."

The surveys and interviews suggest that, overall, secondary market liquidity has continued to deteriorate since the previous study in 2016, with sell-side firms observing the decline more acutely. This is largely attributed to the capacity of dealers to provide liquidity becoming ever more constrained by increasing regulatory capital and liquidity costs, as well as by the state of the credit funding and hedging markets.

At the same time, market structure is evolving rapidly, with asset managers looking to new approaches for sourcing liquidity, either becoming more sophisticated in their interaction with market-makers, or through diversifying their use of trading venues and protocols. Participants report that the use of trading venues and e-trading protocols to execute trades has continued to increase over the past years.

The most significant trend since the last study is the increased reliance on automation in the trading process, both for buy-side and sell-side. Sophisticated ‘rules-based', or even algorithmic, automated processes to manage and direct orders to venues or counterparts are commonplace in equity markets and have been widely used by asset managers for many years. As technology becomes more advanced, their adoption in the fixed income space has become more prevalent, initially in the sovereign bond segment, but increasingly, in IG credit.

Another notable development is the accelerating growth of the European corporate bond ETF market, which brings with it new flows in the underlying bond market, as well as new players.

Looking to the future, the study highlights the potential for data management, automation, and the introduction of new liquidity providers, particularly through the growth of the ETF market, as the major contributors to market development. Participants are already making significant investments in these areas.

Meanwhile, market and prudential regulation are cited as the biggest risks to market liquidity, in particular the anticipated increased capital costs which will be borne by market-makers with the introduction of more punitive capital requirements under the Fundamental Review of the Trading Book (FRTB), and the highly controversial Central Securities Depositories Regulation (CSDR) mandatory buy-in regime.

General macroeconomic and geopolitical uncertainties also feature high on the list of market concerns.

The study calls on market stakeholders, including regulators and policy makers, to act quickly to prevent further decline in liquidity, and to help foster the development of Europe's corporate bond market.