Bond Quotes and Performance Art – Bloomberg View
March 23, 2017 \ 12 Comments
Full Article: Bloomberg View
There’s something a bit creepy about this story, which is not so much about a hedge fund that discovered it would lose money if it was forced to sell a bunch of bonds all at once — though that is true — as it is about a hedge fund that looked into where it could sell bonds and found out that everyone’s whole concept of fair value was completely wrong.
I think this story highlights 2 key points. One is that unless pricing comes directly from risk it is open to manipulation. This is is interesting given most if not all market data companies tell the world they have the best pricing source and sell ‘their’ data for significant profit when in reality is is based on these exact RUNZ that are being manually generated by the Sell-side. Point 2 is I find it very unlikely that the Sell-side did not recognize a forced seller in illiquid instruments and treated the client accordingly. At it’s core though this article highlights… Read more »
Just wondering who outside the bond market would find anything extraordinary about the client to trader dialogue? Regulators may be a little surprised of course, so might end investors. The key point is that bond market liquidity is as much about who is being asked to provide it as about the underlying security. In bond markets there is a very small, homogeneous group of liquidity providers, dealers. In other asset classes like FX, Equities, housing & art it is possible to reach a much wider liquidity pool. Therefore the cost and time to execute can be far lower and more… Read more »
First of all, Matt Levine is the James Brown of financial market structure media. Puts in work almost every day. Respect! This topic of bond quotes and valuations is not unlike the hoax that parents play on their children at Christmas (apologies to any 7 year olds that read this discussion board). If all the adults pretend that Santa is real, the kids buy in to the magic of the supernatural. Eventually though, kids get older and start asking really good questions like, “how could Santa get inside our house when we don’t have a chimney?” or “what’s the criteria… Read more »
No new news here but allows us to pontificate a little on some things. Boaz Weinstein ran Deutsche Banks global credit business. He knows how the business works and he knows not to depend on quotes, never mind one point quotes on triple C bonds. The authors point that this is a story….about a hedge fund that looked into where it could sell bonds and found out that everyone’s whole concept of fair value was completely wrong is silly. Mr. Weinstein knows that peoples quotes aren’t meant to represent ‘fair value’ but levels at which they are willing to transact… Read more »
There are solid parallels in here to threads we see in previous articles and commentary, where innovators think the process around market data can be improved. Trader: Most likely below where you care. 50- 2mm Weinstein: See it quoted much higher. Actually you should change your 65/66 quote I guess. (quotes sent outside market context to attract interest) Trader: sure do u have a two sided market? Trader: or what is an appropriate quote? (trader looking to the buyside for where others are quoting the bond to get context) Three banks returned bids on the McClatchy bonds, with a high… Read more »
A few comments: Pricing Sources: As we all know, there is no one point of value for a bond and in many respects, that is one inherent issue with pricing sources. The pricing reflects all sizes of a position. So, an oddlot is marked the same as a roundlot. It also does not factor in liquidity, ratings, deal size, etc. An even bigger issue is that every evaluated price for illiquid bonds is a “one off” price as the inputs are spotty at best. The price may have been derived from a round or oddlot TRACE print (which in itself… Read more »
“somehow FI should be held to a different standard?” Yes, it absolutely should. This is Joe Publics’ money we are talking about here that is supposedly managed by professional, regulated firms. When the meltdown arrives the media will ask, “why weren’t investors told the bond portfolio valuations were a best guess basis?” and “why are investors queueing outside asset management firms trying to get their money back?”. It will not take long for the lawyers to take “a commercial dispute involving a good faith disagreement over the valuation of two highly illiquid corporate bonds” to a class action against asset… Read more »
Perhaps I mispoke: My commment was less so about whether this is beneficial for Joe Public or not, but more so about whether this could actually be fixed. Of course Joe Public should be protected. However, my point is that the same problems exist in the housing market and it is a larger, more easily understood market. Then how is it to be resolved in less liquid and less easily understood fi? Presumably with housing, Joe Public has a better understanding of the risks because houses are more tangible and better understood. At the same time, these investment firms purchasing… Read more »
Providing appropriate warnings to the retail investing public is a much better solution to the problem than trying to create liquidity where it does not exist.
But my bet is the public would still buy anyway and still get shafted. With the reach for yield in the zero rate environment, everyone is set up for the slaughter now.
Too true. In spite of all the regulation and Fintech, Fixed Income remains the bad boy of financial markets and still very likely to be instrumental in the next crisis.
This has got my back up in a BIG way. As both a former proprietary and market marker focusing on far more illiquid issues, at worse market times (height of the crisis), I am aghast at the way the client was treated. I would never dream of spivily asking the client where his bid was – amateur nights no matter how tight you are with the client – let alone bond legend Weinstein. I am genuinely shocked the dealer had the audacity to ask this. Nor would I send out bonds runs without the caveat ‘indic’ if I wasn’t firm.… Read more »
This story graphically illustrates the present liquidity gradient in Fixed Income evidenced by at one end of the curve, large liquid, high grade bonds trading frequently in good volume, to the other end described in this case. Regulation and balance sheet costs have reset liquidity provision. Quotes and evaluated prices in any but the most liquid bonds are no indication of liquidity. Look at what the GS trader (quoting 63/66) said; “not making it” (the basis), “I don’t want to buy or sell those bonds”, “that’s why i quote them for the most part”, “if you like a bid i… Read more »
Blackrock’s Richard Prager: The Liquidity Is Out There – Institutional InvestorMarch 18, 2016
Everyone is Worried About the Thing Markets Need Most, But They’re Not Asking the Right Questions – Business InsiderMarch 25, 2016
US Companies Overpaying for Bonds; Banks May Be to Blame – ReutersMarch 31, 2016