The Real Reason Why There is No Bond Market Liquidity Left – ZeroHedge
June 11, 2015 \
5 Comments
There is a broad-based problem insofar as the investor base across markets has developed a greater tendency to crowd into the same trades, to be the same way round at the same time. This “herding” effect leads to markets which trend strongly, often with low day-to-day volatility, but are prone to air pockets, and ultimately to abrupt corrections. Etrading if anything reinforces this tendency, by creating the illusion of liquidity which evaporates under stress.
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As a thought experiment, try to imagine financial markets as they existed two centuries ago: gold and silver served as circulating currency, no central bank issed fiat money, exchanges in multiple cities, bonds more prevalent than stocks, essentially no state regulation. Somehow, these markets served as efficient mechanisms for risk transfer, while still being imperfect. We had booms and busts, panics and manias, just as we do today. But these tended to be short-lived and self-correcting. Markets cleared, assets and liabilities found new price levels, and life went on. The primary difference between then and now: who pays. Once, investors,… Read more »
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 banks add, the more they disrupt the natural heterogeneity of the market.” I… Read more »
“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 the market does fall out of bed, in most FI markets there aren’t any really efficient mechanisms for… Read more »
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 different forms. It’s a a situation where they “giveth and taketh away”. In the late 80’s-early 00’s the central banks… Read more »
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 corporate bond market!) and then re-sellers appear, not at prices slightly higher than… Read more »
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