Payden & Rygel director Eric Souders believes that absolute and unconstrained bond strategies – which eschew benchmarks and focus on returns over time – will become more prominent in the marketplace.

Regulatory changes have exacerbated the liquidity issues, he explains.

“Unlike equities, fixed income does not trade on an exchange, but rather over-the-counter, through a broker-dealer community that facilitates all transactions. Heightened regulation in recent years has permanently impacted broker-dealer capacity. Consequently, reliance on the broker-dealer community for liquidity purposes is challenged in many environments.”

Fixed income liquidity has become more “fragile”, Souders commented, with prices “dislocating” periodically.

“This dynamic can impact entire asset classes, particularly during extraordinary periods like COVID-19,” he added.

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