Liquidity is drying up across the bond markets. Regulations designed to curtail banks’ leverage have had the unintended consequence of also sharply reducing their ability and willingness to make markets in corporate and even government debt. New regulations on the leverage ratio that will reduce banks’ repo funding books threaten to make matters even worse and to spread the drought from credit markets to rates, the underpinning of all financial markets. Secondary markets are close to a breakdown that will soon imperil the primary markets on which companies and sovereigns depend for funding. All that is masking the decay is the extraordinary actions of central banks. Their stimulus has created what looks like an asset bubble, siphoning abundant investor flows into bond funds all betting on declining rates and narrowing credit spreads. Asset managers’ trade-execution desks have been more worried about how to buy bonds than whether or not they might ever be able to sell them again. And the enlarged primary markets, in which Apple was able to sell $17 billion of bonds in a single go, with lead banks eagerly trading bonds in the first few days after launch, have obscured the underlying structural weakness in secondary markets. But just take away the central banks’ extraordinary provision of stimulus and liquidity and those investors will be left gasping. Investors have spent much of the past few years blaming banks for failing to make markets, blaming regulators for harming their ability to do so and even blaming borrowers for issuing too many different bonds that it’s near impossible to trade. It’s now time that investors took responsibility and did something about the situation themselves. New venues are being set up for asset managers to trade with each other as well as did the bank dealers. These new venues bring new trading protocols, new choices besides the now inadequate request-for-quote model that institutionalizes investor dependence on dealers to make markets. These new solutions will succeed only if investors fully embrace them. They must dare to show their orders and start making dealable prices to other asset managers, rather than just sitting back and waiting for dealers to quote prices to them. That requires a new way of doing business. But if investors don’t make the effort, the consequences might be disastrous.
Liquidity in the world’s bond markets has reached crisis point. Investors can no longer rely on banks to provide a crucial intermediary function in secondary markets. It’s now time that investors took responsibility and did something about the liquidity challenge themselves. Failure will be disastrous for global financial markets.
by: Peter Lee
Source: Euromoney
Liquidity in the world’s bond markets has reached crisis point. Investors can no longer rely on banks to provide a crucial intermediary function in secondary markets. It’s now time that investors took responsibility and did something about the liquidity challenge themselves. Failure will be disastrous for global financial markets.
by: Peter Lee
Source: Euromoney
