Italy Bond Rout Worsened by Bank Capital Rule, Investor Says

(Bloomberg) -- On a day when traders were left licking their wounds, one money manager pointed a finger at regulators.

While the sell-off was driven by fears that Italy will leave the euro zone, it was made worse by post-crisis banking rules that curb banks from making prices and taking on risk, said Lutz Roehmeyer, chief investment officer at Capitulum Asset Management, which oversees 200 million euros ($230 million) in assets.

“Since 2008, with nobody at a bank to take positions and intermediate buyers and sellers, the market is always on one side,” he said by phone. “So everybody is selling Italy and there’s nobody with a big bank book on the other side.”

The Berlin-based fund manager said he bought about 2 million euros of 10-year Italian government bonds denominated in sterling on Tuesday. As he doesn’t expect liquidity to recover, his strategy is to hold them to maturity.

His view was backed by Andy Hill, senior director at the International Capital Market Association, who said that bond market liquidity has been in rapid and pronounced decline since 2010, mainly because of new capital rules increasing the cost of market-making.

“Thin markets and episodic volatility spikes are the new normal and likely to remain,” Hill said. “It will be really interesting to see what happens after the European Central Bank stops quantitative easing.”

The ECB’s regular bond purchases of sovereign and other bonds have ensured a baseline level of buying interest for Italian debt since late 2015. Analysts polled by Bloomberg expect those purchases to stop by the end of this year.

Capitulum Asset Management’s Roehmeyer also said that:

  • “There’s more and more illiquid order-based trading in bonds and price changes are greater than before the ’08 crisis.” That’s a problem for investors whichever way the market is moving, he added.
  • Plunging stocks don’t suffer from the same illiquid as bonds as they are mainly traded electronically

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