WolfmanAugust 9, 2015"There will be a version of this dream that will come true, but it will take time and technology to accomplish. Technology is changing and challenging every industry and there will be new products that expand capital creation; we'll just have to keep working on it. BTW, I think Mr. Hedges is helping to lead the thought process on this one!…"
JesterAugust 8, 2015"Absolutely a dream, and the author touches on exactly the reason why: " Frequent issuers may present some opportunity for larger issues, if investors offer them sufficient incentives and don’t simply expect them ‘to do the right thing’ as ‘custodians of the market’ or jump for the promise of ‘cheaper borrowing rates tomorrow’.".....There is nothing motivating eligible issuers to accommodate the benchmark request. This type of change in behavior requires large incentiv…"
MerlinAugust 6, 2015"The answer is 'Dream'. When large investors go to large issuers and offer to buy a ginourmous issue or re-opening at a premium to market levels, then maybe 'reality'. As likely as pigs flying.…"
MerlinAugust 1, 2015"Thanks for this Chris. I find it enlightening yet unsurprising. It seems to provide credence to the long held view by many that the corporate bond market is a one way market with a herd mentality and people always seem late to the party, which is likelywhy you found the overselling you did in your research.. Issuers fill the void when there is no secondary market sellers and this is why spreads tend to gap out (sorry, dont have evidence to share!) During periods of se…"
CharlieJuly 31, 2015"A very interesting perspective. It is always useful to see 'what happened' last time. If we look hard enough we will usually find some relevant data. Thank you for sharing Chris.…"
SundownJuly 31, 2015"I agree with Merlin regarding the ugliness of the articles coming out from the mainstream press. The largest players have been doing this for years, it's no secret to anyone involved in the process. There have been many notable examples- large mega-deals in the early 2000's and the issuance of the bank debentures as a result of the funding of the system immediately post- crisis are just two. Large asset managers continuously strong-armed the dealers in giving them a d…"
CharlieJuly 31, 2015"Benchmarks and 'Fixes' continue to encourage greedy behavior, but never irrational! This time its all about pursuing Alpha that is really fictitious as the Alpha gained is purely about timing. Should the market structure conversation be extended to cover new issue procedures? There are plenty of auction platforms available that would provide an open transparent process ensuring issuers got the best possible deal. The auction idea is far from original I believe GS had…"
GooseJuly 31, 2015"In the current conversation, the market making community has been the favored whipping boy for the media when talking about liquidity in the markets. It’s good to see an article focusing on a very large piece to the puzzle. Blackrock’s viewpoint paper proposals have had a “white knight” feel to them, but their behavior is a large part of the issue. Broadening the conversation around the role the buy side is playing will help to temper opinions, and form more equitable…"
MerlinJuly 30, 2015"Cornering. These articles are getting uglier and gloomier. Is it possible that Blackrocks paper can now actually be interpreted as a self serving act of desperation as they try to figure out how they are going to untangle themselves from the mess they have helped create? They are the biggest fish in a shrinking pond of liquidity...what are their choices but cry for help for the 'good of the market'? Writing a paper is a nice way to try and harangue others into helping…"
GooseJuly 23, 2015"There are some very interesting points in the comments on the retail angle of individual bonds vs. funds and ETFs. Who knows individuals that own FI ETF's? Raise your hand. An investor considers the process of buying, owning, and potentially selling an individual bond. Things to think about. Individual credit risk, examining what pre and post trade transparency (some executions with markups and markdowns) exists, the potential process around selling it, statement mark…"
WolfmanJuly 23, 2015"So, take a look at this and let me know if this chart indicates a good time to be buying bonds. The market structure of the last 35 years has been formed around a bull market in bonds and raised a generation of traders who traded from net long positions. Yes, I know I'm over simplifying this, So, take a look at this and let me know if this chart indicates a good time to be buying bonds: http://s.wsj.net/public/resources/images/OB-TF476_Treasu_K_20120604124920.jpg I ag…"
MerlinJuly 23, 2015"As indicated, no retail investor has lost any money on any of the bonds Apple has issued unless they have sold them and even in that case it may be that they lost less than they would have buying bonds of similar duration of other issuers depending on relative spread performance. My guess is most buy and hold because they are comfortable with the credit and the yield for the maturity of the bond. As already pointed out, Bond Funds are a different story. I own no bond…"
CharlieJuly 23, 2015"What about a thought for investors that bought the 3.45% 30 year issue in February of this year? It is now trading around 85 according to TRACE. That’s even more watches! Bondholders have not actually ‘lost’ any money though, it’s all mark to market and the article omits to mention that angle. Unless Apple defaults investors will be correct in buying a bond because ‘it’s Apple’. Hollywood makes a good point re people buying bond funds not bonds. I think this is very t…"
IcemanJuly 18, 2015"In the first paragraph they highlight the high levels of new issuance due to low rates. What they don’t highlight is the free alpha which has been too hard to pass up and has contributed to the continued new issuance. Would there be as much new issuance in the street if Buy Side firms were not trying to snap it up as an easy way to meet fund targets? In the second paragraph they highlight they are looking for a way forward but what they seem to ignore is what they hav…"
MerlinJuly 17, 2015"This is a much better attempt at trying to move things forward than the last Blackrock paper. Much broader and includes things the buy side should be doing. However, think they have simplified the activity of principal markets where on page 2 they state, 'In principal markets, the broker-dealer bears the execution risk of the transaction.' I would argue that in many cases they are bearing no risk as the execution of the trade is either closing out a position or hedgin…"
GooseJuly 17, 2015"Charlie, thank you for so eloquently stating my position on the benchmark issue concept. Wolfman, I am in complete agreement on the IDB move. “I want to dis-intermediate and anger you….to trade with you!” That was some broadside. Will the street react as they have in the past? Are they still able to?. Interesting that BR says a key move forward is aggregation of market liquidity from different venues. I completely agree…but much easier said than done if you aren’t Bla…"
WolfmanJuly 17, 2015"Remember, the reporter does all the work on a story and the Editor creates the headline. In this case, the editor boils this down perfectly as "BlackRock’s Latest Fix for Bond Trading Is Circumventing Banks". What I find remarkable is the fact that BlackRock has made it a point to throw down the gauntlet and poke the tiger. I agree with Hollywood that BlackRock won't get better pricing in the IDB market than they can when they disclose themselves to a dealer, but the…"
MerlinJuly 10, 2015"Stinger, of course your propensity to take on more risk was directly proportional to your comfort to move it. I myself never wanted to take on a long or short position without having at least three ideas IN ADVANCE of how I was going to move or cover it (which could involve setting up interesting swap opportunities). The game was, maybe still is, to take 70-30 bets instead of 50-50. Also Stinger (aka Ice Man, or do we already have a non-participating Ice Man?), I am g…"
StingerJuly 10, 2015"I wouldn't mind being associated with the 10,000 steps team, but I would draw the line at 10,000 maniacs... Assuming all the necessary pricing formulations are in tact, I quite like this proposal. In my opinion, corporate bonds have always been and will continue to be a relationship driven business (or at least in the foreseeable future), and hence the solution still lies in the ability of traditional trading and sales desks to build and maintain relationships in orde…"
HollywoodJuly 10, 2015"I suggest the 10,000 Hour Team be 10,000-Steps-a-Day members as well. Ensuring sound mind and body. FitBits anyone?! Wolfman - Amen, my brother! The author proposes 2 solutions: Search Technologies and Hedging Instruments. In terms of Search Technologies, all of the solutions suggested are in the market and have existed for quite some time. Most top tier dealers are engaged with CodeStreet, Algomi, or have built proprietary memory capture and bond matching utilities.…"
WolfmanJuly 10, 2015"Goose - thanks for the clip from the flash crash. It was great to hear a human reacting to the impact of a crashing market. We won't hear that anymore as computers are without emotion! As far as Mr. Hedges' proposal (how appropriately named, sir!) I think we need to better understand the entire workflow of corporate capital markets and who they are serving. Is it a valid proposal? Yes indeed. Will a non-fungible contract forcing everyone to trade on a single, for-prof…"
GooseJuly 5, 2015"David Light’s excellent blog post (link found in this week’s newsletter) does an excellent job outlining how the Fed has similar thoughts to S&P’s statement “..Nevertheless, it is far from clear that market illiquidity will necessarily create systemic risk.” Mr. Light concludes the Fed is more than willing to accept less bond market liquidity to safeguard the overall financial system. Of course, that leaves John Q. Public investor, as the one holding the bag when…"
MerlinJuly 2, 2015"Zzzzzzzz....oh, hi there. I hope they aren't paying these authors at Bloomberg very much. A lot of regurgitation (do you recall asking "How did we get here?") where they show us some figures from the S & P report and then a concluding paragraph from S & P. Guess we should read the report to see if they provide substantiation for their conclusions because via the article it just seems like some people pontificating and there are enough of us that take that shor…"
WolfmanJuly 2, 2015"It seems to me that the reduction in inventory by the banks is first and foremost a reflection of the end of a 30 year bull market in rates. In this game of musical chairs, they don't want to be the last person standing when the music stops. This isn't by accident, but by prudent planning by the banks. I would agree with the conclusion that the banks will be impacted to a lesser extent that others, but to what degree the others will be impacted is the real question. G…"
GooseJune 26, 2015"Agreed Merlin. Good salespeople will thrive even if trading increases in dark pools, all to all, etc. Maybe some of the easier trades disappear, but there will be plenty of very interesting OTC opportunities created from the traffic in those venues.…"
MerlinJune 26, 2015"Other thoughts: There used to be an unwritten rule that if you sold someone a new issue you were obligated to provide liquidity in that bond. Does this still exist at least within the first 6-12 months? I can recall our firm getting buried in unwanted bonds once buyers figured out the bonds were held in weak hands. I am all for both internal dealer matching systems and even buy side/buyside and all/all matching systems (I just don't believe the last two can build enou…"
SundownJune 26, 2015"This article highlights the conundrum that exists in the credit markets. Electronic trading usually allows for a number of in every market; (1) Increases transaction speed (2) Aggregates information/data (3) Allows new entrants to fill voids (4) Leads to other changes in the market structure evolution. It usually is more effective in markets that are the more liquid. I agree with many of the points that Mike brings up in the Q/A. Comparing the credit markets to equiti…"
WolfmanJune 26, 2015"The entire squadron is in agreement on this one. It seems that the overwhelming desire by the lawyers writing the laws and regulations to make the fixed income market look like and work like the equities market simply doesn't work. Supporting a market place that enable dealers to make money while providing transparency tot he consumer doesn't remove the obligation of the consumer to do their homework. TrueCar publishes a broad assessment of what people in your area ha…"
ViperJune 18, 2015"The business model of taking interest rate and credit risk as a broker/dealer/market-maker has been in decline alongside the dramatic increase in regulation, capital requirements, and the overall transparency that risk takers know exists when they commit capital. If it were an incredibly profitable business (secondary market-making in fixed income) new entrants would be lining up. Firms that more recently entered the markets as market-makers, prevalent in the rates sp…"
WolfmanJune 18, 2015"First, with all due respect to the FT and to James Mackintosh, all lobbying is self serving...'nuff said. Now, on to the point. The banks, and in this case I would have to assume that Mr. Mackintosh means the Investment Banks, are making the case that regulations are making it more difficult for them to take risk and provide the immediacy to the markets that their clients are accustomed to. There is truth in that and to dismiss it out of hand as lobbying to protect on…"
MerlinJune 18, 2015"Reduction in balance sheet holdings/capital directed to providing secondary market liquidity, would seem to be a product of the changed environment, not the cause of the 'liquidity crisis'. And those changes are both from a regulatory (not just increased capital costs but reporting, compliance mandates, etc....) and structural (huge growth of cash credit outstandings, larger buy side entities through internal growth and acquisition) perspective which have simply chang…"
HollywoodJune 18, 2015"Years ago, dealers had many options to lay off risk and move inventory. These included the synthetic CDO market, prop desks, accrual books, CDS hedges, and negative basis hedges. Many of these risk mitigation outlets have been either reduced or removed from the dealer arsenal. Regulation has had a role in reducing some of these channels.…"
MerlinJune 15, 2015"These are all great comments and seem spot on. I am going to take a different tact. Why do we care so much about this and why do people expect to have the right to have the proper amount of liquidity/immediacy available to them to satisfy their needs? It seems that all markets for all things have to deal with the same issue. Take tickets to a strongly oversubscribed sporting event. Everyone who has access buys their tickets at face value (sounds a little like the NI c…"
SundownJune 15, 2015"This article seems to be so comprehensive that it’s almost impossible to digest. It does a good job of laying out the structural issues in the market place, driven by monetary and regulatory policy. Central banks have become the dominant force in distorting liquidity, more so than at anytime in the modern financial markets. However, what the article doesn’t point out is that central banks have always been the key drivers of overall liquidity and have done so in may di…"
GooseJune 12, 2015""Don't fight the Fed" is certainly a mantra that has been taken to heart by the investment community, and for good reason. Fair value and fundamentals have lost relevance. Traditional hedging tools and securities with high correlations have skewed. Tape bombs like the SNB fall out of the sky. Fund strategies that worked have been abandoned for the one that does. Taking the other side, good as it may look, is a difficult prospect. Anyone want to step up and play? If th…"
WolfmanJune 12, 2015"At the risk of reducing such a comprehensive analysis of the Lack Of Liquidity In Bond Markets, or the LOLIBOMA issue, (I know, I've always wanted to create an acronym as creative as the US PATRIOT Act) I think I'd like to focus on a few of the highlights. According to , the author, "This is not only because of procyclical regulation; it is also because central banks have become a far larger driver of markets than was true in the past. The more liquidity the central b…"
Comments
Bear Markets and the Wisdom of Ages – Chris Ferreri (Eight Point Strategies)
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What No One Ever Says About Bond Market Liquidity – Bloomberg
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Debt Traders Could’ve Bought Millions of Apple Watches With Loss – Bloomberg
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Addressing Market Liquidity – Blackrock White Paper
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Corporate Bond Market Liquidity, A Way Ahead – Hedges Associates
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S&P: All That Bond Market Illiquidity is Bad for Bond Funds, But Not Banks – Bloomberg
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Changes to Trade Reporting May Benefit Large Investors says Mizuho’s Michael Ziegelbaum – Bloomberg Brief
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Bank’s Liquidity Lobbying is Self Serving – FT
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The Real Reason Why There is No Bond Market Liquidity Left – ZeroHedge
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