Illiquidity has long been the 'known unknown' of the bond market - every manager fears it, but it is exceedingly difficult to predict when and how it will come to a reckoning. Aberdeen Asset Management (ADN) is not waiting around to find out. The fund manager has taken out $500m (£320m) in credit lines to fund redemptions in case of a mass sell-off in the asset class.
Greek uncertainty, improving inflation expectations and growing expectations of a US interest rate rise have sent European government bond yields on a stuttering upwards journey. This sentiment is inevitably spreading into the wider fixed-income market, sparking a "bond massacre", in the reading of Bank of America Merrill Lynch. It reported EPFR Global data showing a $5.9bn outflow from the asset class for the week to 10 June, the largest weekly outflow in 18 months, with high-yield and emerging markets debt the main casualties.
Aberdeen's chief executive said the group needs to be prepared in case the situation "gets ugly", and managers find it difficult to sell their bond holdings. The group has not yet borrowed the money, but has established banking facilities that could be drawn on if necessary. It follows a similar move by fund giant BlackRock to ramp up the amount that its mutual funds can collectively borrow in case clients decide to cash out.
The key is whether such credit lines are taken against the investment fund or the group - the latter would introduce unwanted asset risk onto the balance sheet. "By putting the group's capital in the fund what you do is transfer the risk of the fund onto the group's balance sheet," says Arun Melmane, an equity analyst at Canaccord Genuity. So it is not suprising Aberdeen's facilities are to be linked to the fund, not the company itself. The other option for affected managers is to sell the holdings, with the difficulty that would entail in a sliding market, or the more extreme measure of putting a pause on redemptions.
