Now We Have Two Answers to the ECB Corporate Liquidity Question – Bloomberg
August 3, 2016 \ 6 Comments
Full Article: Bloomberg
Now the ECB is in full throes of CSPP, which began June 8th, and disclosed information about its holdings on July 18th, we have the data to test out these liquidity fears. Firstly, a big caveat is in order. There’s no standard and objective measure of bond market liquidity since bonds are predominately traded over the counter (OTC), unlike stocks
This is a very small market when compared to the sovereign debt markets of previous programs. If the BoE is limiting the purchases to Sterling-denominate corporate debt, it’s even a smaller universe of bonds. Limit that choice to high-grade, non-financials, which they will likely do, and, you guessed it, smaller yet. As a result, we can expect little in the way of a positive impact on the economy and it will come at the cost of corporate bond liquidity. The moves by Central Banks to provide liquidity to their respective economies doesn’t negate the structure of Capital Markets. Does anyone… Read more »
The ECB is infusing an otherwise artificial bid to the corporate bond market – forcing yields down to articially lower levels. Investment decisions by bona fide ‘real’ investors therefore become skewed in teh search for yield; in teh extreme confidence is lost in the investment process forcing investors on the sideline and ironically to hold more cash (the antithesis of the desired result and with reduced opportunity cost). This negatively affects the true market price of risk, artificially lowers borrowing rates for corporations – inciting further borrowing at a time of record aggregate private and public debt while incrementally debasing… Read more »
I am in the camp viewing the ECB as creating a bigger liquidity problem. Not because they are competing with investors for bonds; in that regard they are just another player in the market, although a big one! But because the program has injected uncertainty into the market about which bonds it is buying/will buy and when they reach their max holding amount. Market makers and investors both now need to navigate this uncertainty in an attempt to determine the proper pricing of a bond. Given their size and impact on the market this creates significant uncertainty and uncertainty reduces… Read more »
Like others, I am, um, very suspect that the emergence of the ultimate supertanker in the shallow waters of bond market liquidity will have no ill effect. Chart 2 seems to show a gradual widening of the non-eligible vs. the eligible and purchased. Crowding into the trade and the action, plus more trade data points to manage risk against, while the have nots suffer?
Supertanker oil spills do severe damage to the ecosystems in which they operate.
I’m also in the camp that they are creating a bigger liquidity problem. It’s very hard to surmise that the ECB isn’t creating a liquidity problem when the author correctly admits that: “Firstly, a big caveat is in order. There’s no standard and objective measure of bond-market liquidity since bonds are predominately traded over the counter (OTC), unlike stocks. As a result, market benchmarks to gauge a snapshot of liquidity conditions — roughly defined as market participants’ ability to buy and sell bonds, on a given stable trading day, without triggering a material shift in their price — are imperfect… Read more »
This article and debate stops and starts with one key statement from this article: “Firstly, a big caveat is in order. There’s no standard and objective measure of bond-market liquidity since bonds are predominately traded over the counter (OTC), unlike stocks. As a result, market benchmarks to gauge a snapshot of liquidity conditions — roughly defined as market participants’ ability to buy and sell bonds, on a given stable trading day, without triggering a material shift in their price — are imperfect and subject to debate.” Let’s digest this for a moment. There is a massive debate about a multi-trillion… 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