By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) Wednesday said increase interconnectivity of global capital markets have induced investors to search for higher yields.

This is coming on the heels of the 13th IMF Public Debt Management Forum and 3rd U.S. Treasury Roundtable on Treasury Markets and Debt Management in Washington United States.

Nemat Shafik, Deputy Managing Director (DMD) of the IMF in her opening remark, said: “The global financial crisis brought to light a number of previously underappreciated interconnectedness and vulnerabilities in both the financial and sovereign spheres. There are seismic shifts now at hand in global debt markets, and financial markets more generally, which have to be taken into account to keep markets liquid and deep.”

Apart from increase in interconnectivity, there is the associated cross-border investments and non-conventional monetary policies inducement to investors for higher yields, which the IMF affirmed is having a profound impact on the composition of the investor base for government debt in the past decade

“As a result, holdings by non-resident investors increased for most countries, although there has been some reversal of this trend in some of the euro area countries”. The IMF said.

Also, participants discussed the potential impacts of regulatory changes in the financial system and the unwinding of the unconventional monetary policies on the liquidity of government debt.

The IMF affirmed that in advanced economies, the liquidity of government bond markets appears to have decreased somewhat.

According to the Fund, there are now more buy-and-hold investors as a result of increased exposure by foreign central banks and sovereign wealth funds, as well as regulatory changes, which require larger holdings of high-quality assets.

“For emerging markets, local government bond markets have seen improved liquidity as a result of the increase in the non-resident private investors.

The IMF says these developments were not without risk given the heightened potential for a sudden capital outflow. “Debt managers noted the need to prepare for such an event and manage it carefully. To mitigate the risk of non-resident investor outflows, debt managers have extended average maturities, built cash buffers, and diversified their investor base, while increasing flexibility in debt management operations”. The IMF affirmed.

Again, participants discussed the definition and measurement of liquidity in government bond markets and the benefits of having a liquid bond market.

They affirmed that fostering liquid government bond markets is a key policy objective for debt management, but it also involves trade-offs.

According to them, in countries where the priority is market access to ensure that the government’s financing needs are met, liquidity might be sacrificed in favour of offering diverse products demanded by non-traditional investors.

On his part, Luc Everaert, Assistant Director of the IMF’s Monetary and Capital Markets Department, said that debt managers play an important role in determining liquidity, while flexibility in times of stress is critical to maintain market access.