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T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. T. Rowe Price has been independently verified for the twenty four-year period ended June 30, 2020, by KPMG LLP. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

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Global Fixed Income

Liquidity in Fixed Income Markets

Andrew McCormick, Head of Fixed Income

Security selection and communication are integral to our approach

Key Insights

  • Liquidity across fixed income markets has been extremely challenged in recent weeks.
  • Central banks have begun to address the problem with a range of measures, but it may take time before the market is fully functioning again.
  • We are addressing concerns about liquidity

What is the current state of liquidity in fixed income markets?

Liquidity across fixed income markets, from high‑quality government bonds to credit markets, has been extremely challenged in recent weeks. Commercial paper, which is unsecured debt issued by companies to fund short‑term obligations, has also been facing a liquidity squeeze. There are a number of reasons for this, including a large number of exchange‑traded funds needing to sell. Overall, there is high demand for cash right now, but this comes at a time when work location contingency plans are being implemented and trading desks are being split into different areas. This is not helping the efficient functioning of markets. Furthermore, constrained liquidity has been exacerbated by post‑2008 financial crisis regulations that dramatically increased bank capital requirements, discouraging or even preventing securities dealers from holding risk assets on their balance sheets. Such measures have even put a strain on trading activity in Treasuries— the most liquid bond market. The conditions are making it difficult to both buy and sell fixed income securities at present. Bid offer spreads have materially widened as a result, and in some cases, they may not be available.

What are the central banks doing to address the problem?

Central banks are the stewards of liquidity, and they’ve begun to address the problem quite aggressively. Over the weekend, the U.S. Federal Reserve cut interest rates to a target range of 0% to 0.25%, launched a USD 700 billion quantitative easing program, and announced a series of other measures to enhance liquidity and improve confidence in markets. This included reaching an agreement with five other major global central banks (euro area, Japan, Canada, UK, and Switzerland) to enhance the terms of a standing swap line facility. This facility, which had its origins in the 2008 global financial crisis, allows for the borrowing of U.S. dollars in non‑U.S. currencies to support the international supply of dollars. Similar to other major central banks, the Fed also reduced the reserve requirement ratio—the minimum amount a bank must hold in reserves—to zero. This is to encourage and support lending to small and medium‑sized businesses.

Opening Quote Central banks are the stewards of liquidity, and they’ve begun to address the problem quite aggressively. Closing Quote

How is T. Rowe Price responding?

We have been managing fixed income portfolios on behalf of our clients for over four decades. We have extensive experience navigating through numerous market cycles and challenging environments. During this crisis, like all the others we have been through, we will stick to our investment process. Integral to this is security selection—we try to be very careful about what we put in our portfolios in the first place. Second, we believe it’s important for investors to take a long‑term perspective and not do anything rash during periods of disruption. Nonetheless, if our clients need us to take action, we will make every effort to do so in the most efficient way possible.

At T. Rowe Price, we have experienced trading teams across the globe to help us navigate the current market conditions.

We remain focused on:

  1. The importance of overcommunication within our trading teams, portfolio managers, and sell‑side counterparts as many trading and related functions are currently split among different locations; and
  2. Our trading protocols, including high‑touch and low‑touch trading strategies, to examine how they are reacting to the current volatility.

Over the years, T. Rowe Price’s global trading teams have placed great emphasis on building strong relationships with our sell-side counterparts, positioning us well to utilize all channels of execution.

What can we expect in the future?

The action taken by central banks, such as the Federal Reserve, is welcomed, although it may take time before we see the fixed income market fully functioning again. In particular, we need to see improvement in the transmission mechanism of the liquidity that central banks are providing into credit. This may require new programs like what we saw during the global financial crisis, such as the Troubled Asset Relief Program. These can take time to develop and implement, but we are confident that these programs will come with authorities and central banks working together.

Another factor that could play a role in liquidity over the next few weeks is the potential for asset allocation changes. After a strong run in high‑quality fixed income markets, it’s possible that investors could decide to take profits and allocate into equities. In this type of scenario, fixed income securities would need to be sold in order to meet redemptions, which again could exacerbate liquidity issues. We are monitoring this closely.

Opening Quote Irrespective of conditions, T. Rowe Price continues to stand ready to service the needs of our clients. Closing Quote

Irrespective of conditions, T. Rowe Price continues to stand ready to service the needs of our clients. We expect to invest new inflows as well as finance any possible outflows in the near future depending on our clients’ risk appetite and willingness to recalibrate their asset allocation. In a redemption situation, it will be important to communicate and give advance warning. This will be key as we strive to execute as efficiently and as cost‑effectively as possible. The ability to work in close partnership will ultimately enable us to best serve our clients.


Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., distributor, and T. Rowe Price Associates, Inc., investment advisor.

© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

202003-1124669