The Bank of England will conduct further assessment of the asset management industry in relation to the corporate bond market, following a paper outlining liquidity concerns in the event of a 'severe' market shock.
In its report, Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds, the BoE found that a large round of redemptions from funds investing in corporate bonds could ultimately hurt financial stability. In particular, it is concerned about 'fire sales' in one area spreading to others, which would make the entire system risky. The report said: "Under a severe but plausible set of assumptions regarding market participant behaviours, investor redemptions can result in material increases in spreads in the corporate bond mark...
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