Posted inFixed Income

Regulators issue warning on European bond funds

The trio of supervisors – the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pension Authority (EIOPA) – emphasise in a report issued last week that mutual funds invested in European debt “could be exposed to risks in of the event of sudden asset price shocks.”

Red flags?

The three note that the average maturity of bonds from the euro area held by mutual funds has gone up sharply during the past years, and now averages eight years, while only 6% of bonds held have an original maturity of less than one year. As a consequence, “concerns around liquidity risks in the sector are rising,” the regulators note. On top of that, the three supervisors say “the resulting maturity risk is accompanied by a general downward shift in credit ratings, indicating the increasing credit risk of fixed income products.”   

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A fund selector of a European private bank acknowledges that professional investors have resorted to more risk-taking compensating for the lower yields they generate on their bond investments. “But to issue a warning like this is somewhat overdone,” she says. “I don’t think it’s fair to generalise all European bond funds, as every fund manager has his own, unique mandate.”

Part of the Bonhill Group.