Bankers and Regulators Voice Fears on Bond Market Volatility
May 6, 2015 \
7 Comments
(DealB%k – Peter Eavis)
Those voicing such fears say that recent changes in the bond market could change the way that Wall Street banks, large bond funds and trading systems would behave in a period of turbulence. Other developments have left the market vulnerable, they say. A huge rally in bond prices over the last several years, stoked by vast amounts of monetary stimulus by central banks, may have made the market vulnerable to a sharp sell-off.
Comments
I no longer follow this data, but when I did, over the course of many years, primary dealers were net *short* U.S. Treasury issues, yet the market functioned perfectly well, with relatively narrow spreads and daily trading volumes that would make the stock market look puny by comparison. So smaller dealer inventories do not presage disaster when rates inevitably rise. When liquidity vanished for mortgage derivatives, commercial paper, etc. in 2007-2008, Dodd-Frank was not yet law, so while I oppose Dodd-Frank, it does not make disaster inevitable either. No sentient being thinks that ZIRP can go on forever, but neither… Read more »
Another one about the imminent bond crisis. But with a slightly different twist as Mr. Stanley seems to have it right if in fact a crisis were to develop, “The dealers are profit motivated, so they are not going to catch a falling knife.” And why should they? Dealers will support the market when they feel they can earn an adequate return on their money from their market making businesses (since they can’t buy to position anymore). Unclear why one would expect anything more. Regarding the buy sides role in this ‘upcoming crisis’; pretty sure no one forced accounts to… Read more »
As Chuck Prince said, “when the music is playing, you’ve got to get up and dance.” The regulators and fed have been jamming, and the asset managers have been dancing. Now the band is exhausted and trying to leave the stage, but the audience begs for one last encore. As Slider indicated, we don’t know the time, but imbalances will eventually correct. Viewing the world from my seat at 40,000 feet….asset prices will find the proper level, be it in an OTC market with large gaps in price discovery, or in an electronic market via trackable and volatile price swings.… Read more »
Where do I begin? Market vulnerability? The street acting in it’s own best interest? Perhaps the government acting in its own self interest? If we look at the 10-year note yields from 1945 to 2015, you see a beautifully drawn image of Mount Everest, with the peak sometime around August 1981 with a yield higher than 14.5%. As rates began to rise, the market relied on what it knew best and predicted many time along the way that 6, 7, 8, 10 or 12% would likely be the peak rate of all time. What was learned from this? The fact… Read more »
Bond market liquidity gets more focus instead of the size of the asset manager’s assets versus the street’s capital. The street still has a tremendous commitment and incentive to participate in both the US Treasury/government markets and spread products, but is now fully aware that when the asset managers need liquidity it makes no sense to step in front of that train. Other than the occasional flash crash, asset manager’s growth and size is not so much the culprit but the elephant in the room of bond market volatility and vulnerability. I don’t see any of those large AM’s volunteering… Read more »
What is interesting is what is not being said. When redemption’s start happening there will be a list of assets that will have liquidity however this is likely to be far less as a proportion to the total amount of cash required. In short if a fund manager wanted to sell 50% of his portfolio to meet redemption’s it is likely he will only get prices on a small proportion of the assets as dealers balance sheets have changed which is a direct impact from regulation. The simple reality is the size of the balance sheet is not the issue,… Read more »
The question posed at the end of the article is really the starting point. The bottom line, is investors have had the luxury of knowing that the banks will always be there to step in to take risk in times of need because the dealers have enjoyed the luxury of cheap leverage over the years. I guess my questions in response would be “Is it a god-given right for an investor to not bear the actual market risk of the security they are buying? Should they simply just be responsible for evaluating the credit risk of a bond and be… Read more »
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