Is There Ample Liquidity In The Market?

Howard Marks on Bloomberg this morning:


Also from Bloomberg,

Researchers at the Federal Reserve Bank of New York are dismissing concerns that the corporate-bond market is on the verge of a liquidity crisis.

Two measures of the difficulty of trading the debt have fallen below levels seen before the financial crisis, researchers Tobias Adrian, Michael Fleming, Or Shachar and Erik Vogt wrote in a blog post on the New York Federal Reserve’s website.

There is “ample liquidity in corporate bond markets,” the researchers wrote. They said the market had shifted and liquidity was “not exclusively provided by dealers but also by other market participants, including hedge funds and high-frequency-trading firms.”

Investors are yet to be convinced.

“I’ve read the research, but I’ve also traded bonds for 20 years, and it’s a lot harder to buy and sell bonds than it used to be — and any other suggestion is laughable,” said Thomas Murphy, who oversees about $26 billion of corporate debt at Columbia Threadneedle Investments.

“There is a small and shrinking list of names where trading works well, and everything else is more difficult than ever.”

Investors and Wall Street executives including JPMorgan Chase & Co.’s Jamie Dimon raised concerns this year that banks can no longer act as market makers and step in to buy when investors sell. Dealer inventories of corporate bonds plunged more than 76 percent in the years after the financial crisis as tougher banking regulations made it more expensive for them to hold risky assets.

At the same time, easy-money policies from central banks have pushed more investors into higher-yielding corporate debt, with companies selling more than $7.4 trillion of bonds in the past five years.

Regulatory Priority

The Securities and Exchange Commission and the Financial Industry Regulatory Authority have made trading in fixed-income markets a priority in the past year as asset managers including Pacific Investment Management Co., BlackRock Inc. and AllianceBernstein Holding LP urged regulators to focus on liquidity in debt markets. The money managers sought to address what BlackRock last year called a “broken” market.

The increased focus from regulators may not be enough to prevent problems in a crisis, said Andrew Brenner, the head of international fixed income for National Alliance Capital Markets.

“Corporate secondary liquidity is a huge problem,” Brenner wrote in a note to clients. “Sorry, but I don’t believe that academics who have never traded a bond in their life know anything about day-to-day liquidity.”


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