{"id":31270,"date":"2015-11-19T02:51:47","date_gmt":"2015-11-19T07:51:47","guid":{"rendered":"http:\/\/prefblog.com\/?p=31270"},"modified":"2015-11-19T02:51:47","modified_gmt":"2015-11-19T07:51:47","slug":"november-18-2015-2","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=31270","title":{"rendered":"November 18, 2015"},"content":{"rendered":"

Assiduous Reader JP, who sends me more interesting links than all the rest of youse other bums combined, brings to my attention a popular press story on corporate bond liquidity<\/a>:<\/p>\n

Add one more name to the chorus of doom. Earlier this week, Andrew Tyrie, the Conservative MP and chairman of the Treasury Select Committee, wrote to Mark Carney, the Governor of the Bank of England, to express his concern about bond market liquidity \u2013 or, more precisely, the lack thereof.
…<\/b>
\nIn May, Nouriel Roubini, the US economist made famous for predicting the US housing problems that led to the financial crisis, wrote about \u201cthe liquidity timebomb\u201d<\/a>.<\/p>\n

In June, Stephen Schwarzman, the chief executive of private equity firm Blackstone, penned a comment piece for The Wall Street Journal<\/a> on bond market liquidity entitled: \u201cHow the next financial crisis will happen\u201d.<\/p>\n

Why has what sounds like a pretty niche subject got so many knickers in such a twist?
…<\/b>
Regardless, there\u2019s little appetite among regulators to row back on capital rules. So liquidity may need to come from somewhere else. One theory is that fund managers should try to trade directly with each other (although the fate of Bondcube, an online marketplace which tried to facilitate such transactions but went bust in July after only three months because investors couldn\u2019t agree on prices without the involvement of a broker, doesn\u2019t bode well).<\/p>\n

Or perhaps the amount of liquidity available before the crisis was the aberration and we now need to reset our expectations. Should, for example, investors be allowed to withdraw money, at a moment’s notice, from funds that invest in rarely-traded securities?<\/p>\n

Regulators have made a trade-off. Banks have been made less risky. But, as Bill Gross, the famous bond investor, said earlier this year, that risk hasn\u2019t been eliminated \u2013 it\u2019s just moved elsewhere in the system.<\/p><\/blockquote>\n

Nouriel Roubini’s piece makes the point:<\/p>\n

As a result, when surprises occur \u2013 for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up \u2013 the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast. Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales.<\/p>\n

This combination of macro liquidity and market illiquidity is a time bomb. So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets \u2013 such as bonds \u2013 the risk of a long-term crash increases.<\/p>\n

This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.<\/p><\/blockquote>\n

Blackrock’s report is titled US EQUITY MARKET STRUCTURE: LESSONS FROM AUGUST 24<\/a>:<\/p>\n

Contributors to disruptions on the morning of August 24:<\/i>
…<\/b>
3.Excessive use of market and stop-loss orders that seek \u201cliquidity at any price\u201d inflamed the situation.<\/p>\n