Rob Price, Senior Portfolio Manager – Buy and Maintain Credit, at AXA Investment Managers.
Three years on and credit has been playing an increasingly important role in liquidity management – particularly for schemes with endgame in mind – with a strong focus on how this can be enhanced within the typically 20-50% investment grade credit allocation they hold.
According to Price, there are three things schemes should be doing to boost liquidity within credit portfolios.
1. Diversifying sources of liquidity through asset allocation
“Schemes should first and foremost look at whether changes to asset allocation could enhance liquidity. Different types of asset bring different advantages, and having the right mix helps to balance the potential for enhanced returns with the necessity to maintain sufficient liquidity.
“Cash is the most liquid asset class and therefore the most flexible. It can be used as collateral - for risk-transfers or to fund future asset allocation changes. However, it provides no interest rate sensitivity to help hedge liabilities, nor does it provide any growth potential.
“Short duration credit tends to be more liquid and cheaper to sell than all-maturity bonds, providing more flexibility. Credit spread curves are also flat relative to the recent past so investors don’t give up much, if any, potential return from re-allocating to short duration bonds. However, similar to cash, the matching benefit is limited and insurance companies are unlikely to want to receive short-dated bonds in transactions.
“Asset-Backed securities (ABS) have the benefit of providing a diversified source of liquidity to investment grade credit portfolios, both from the pool of investors in the asset class and the underlying investment risks themselves. They can also provide a meaningful spread pick-up over credit.
“The main drawback is the perceived complexity of the asset class and – similar to the other two options – lack of matching benefit, leading to higher leverage or more collateral being required in LDI portfolios.”
2. Consider how credit repo can provide liquidity while retaining exposure
“Credit repurchase agreements – known as credit ‘repos’ – provide a way to access liquidity from a credit portfolio while also maintaining market exposure. The portfolio effectively borrows capital from a counterparty using credit as collateral, without selling the assets.
“Repos offer schemes several significant advantages, including a buffer of liquidity that is quickly available should it be needed at short notice, for example for the LDI portfolio. They also allow credit portfolio managers to remain invested through market volatility and benefit when markets recover. Finally, they can fund purchases without needing the capital upfront, so that schemes can more easily take advantage of short-term spread moves, potentially improving overall portfolio returns.
“Putting this into practice, one of our DB clients set up a credit repo facility following the 2022 gilts crisis and opted to use it in April 2025 following the Liberation Day and the tariff volatility, with the aim of increasing their level of buffer within LDI hedging arrangements, with the anticipation of heightened volatility in interest rates and credit spreads.”
3. Be ready to take advantage of market conditions
“Credit spreads can widen quickly, and snap back just as fast. A typical DB scheme may not be able to act with the speed required to take full advantage of these moves. Very often, the opportunity has passed before authority to make a trade has been established with a scheme’s different stakeholders.
“The infrequency of spread-widening events, and the high opportunity cost associated with missing them, means a proactive approach could lead to better investment outcomes.
“One solution is to establish a credit trigger framework that puts rules in place to provoke action when certain market movements occur. This could range from consultation with key decision-makers to empowering portfolio managers to make trades when well-defined market conditions are met.
“A trigger framework will define what metrics are considered, the levels that trigger action, the precise course of action to be taken and the source of funding for any trades. Establishing trigger frameworks has become increasingly popular among our clients as can be adapted to the specific requirements of different schemes, ensuring that the framework aligns with their individual governance structures and investment objectives.”
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