"When The Unwind Comes, It Comes Sharply As The Exit Door Is Tiny"

Tyler Durden's picture

Fund managers who together control trillions in assets are starting to panic in the face of an acute bond market liquidity shortage.

Dealer inventories have collapsed in the post-crisis regulatory regime, eliminating the traditional source of liquidity in secondary corporate credit markets, while HFTs and central banks have combined to create the conditions under which USTs and German Bunds can, at any given time, trade like penny stocks (October’s Treasury flash crash and May’s dramatic Bund rout are the quintessential examples). 

This environment has catalyzed a shift away from cash markets and into derivatives, as investors move from cash Treasurys to futures...

...and fund managers look to offset diversifiable flows with ETFs whenever possible to avoid tapping the underlying bond markets...

This shift serves to make cash markets ever more illiquid as trading dries up. 

Some firms (Vanguard among them, according to Reuters) are lining up emergency liquidity lines to tap in the event of a retail bond fund exodus. The idea, it seems, is to use borrowed cash to pay out investors rather than sell the underlying bonds into an illiquid market and risk triggering a self-reinforcing market collapse. 

Others are simply moving to cash. TCW for instance, is now “the most defensive [it’s] been since pre-crisis,” while Ian Spreadbury, who manages around $5 billion over several Fidelity bond funds, did the unthinkable (for a mainstream fund manager) last week when he recommended investors use the nuclear option and hold physical cash under the mattress. Overall, bond funds now old 8% of their assets in cash — the most in at least 16 years. Bloomberg has more on how the only three things that matter in the bond market are “liquidity, liquidity, and liquidity”: 

There are three things that matter in the bond market these days: liquidity, liquidity and liquidity.


How -- or whether -- investors can trade without having prices move against them has become a major worry as bonds globally tanked in the past few months. As a result, liquidity, or the lack of it, is skewing markets in new and surprising ways.


Spain, for instance, must pay more to borrow money than Italy for 30 years, even though Spain is considered safer by credit raters. Why? The Italian bond market is twice as big as the Spanish one -- and, therefore, more liquid.


The same thing is happening around the world. Bonds in smaller, less-traded markets like Finland, Singapore and Canada are starting to fall out of favor. And with the Federal Reserve preparing to raise U.S. interest rates, investors want to know they can sell in a hurry if debt markets turn volatile.


Concern liquidity is drying up has intensified as the global bond rout that erupted in April erased more than a half a trillion dollars from sovereign debt and triggered swings some have likened to a once-in-a-generation event.


Aberdeen Asset Management Plc has already said it arranged $500 million in credit lines to fund potential withdrawals. In the U.S., regulators will meet with Wall Street firms to discuss how they can prevent post-crisis regulations and central bank policies from sparking a meltdown when the next selloff occurs.


Some investors aren’t waiting to find out. In Spain, where a slump in repurchase agreements and trading of bills sent government-debt turnover in April to lows not seen since at least 2012, they’re starting to demand a bigger premium to own the securities, data compiled by Bloomberg show.


Investors told the Bank of Japan this month that while bid-ask spreads are narrow for small orders, more sizable transactions can cause unexpectedly large price swings, according to minutes of meetings held on June 11-12.


Bond investors are fixated on liquidity after years of easy-money policies by the Fed and other central banks locked away trillions of dollars of supply and prompted everyone to crowd into the same trades.


Regulations designed to limit risk-taking have also caused big banks to back away from their traditional role as middlemen by reducing the number of willing buyers, exacerbating price swings and potential dislocations as the Fed moves to lift rates for the first time since 2006.


“When the unwind comes, like we’ve seen in the past few months, it comes abruptly and sharply as the exit door is tiny,” said Ryan Myerberg, a London-based fund manager at Janus Capital Group Inc., which oversees about $190 billion.

There's the crowded theater analogy again, and while it's become something of a cliche when used as a metaphor for illiquid credit markets, the fact that the bond "exit door" has shrunk rapidly during the same period over which HFTs and central banks have come to dominate the market certainly seems to indicate that however one wants to conceptualize "liquidity" (it's a somewhat amorphous concept), algos, regulators, and central planners have been instrumental in turning off the faucet.

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Soul Glow's picture

Market crashes are single day events, or else they wouldn't be crashes.

remain calm's picture

They are a process. It will not go down 80% in one day. 

SoilMyselfRotten's picture

And the door to own PMs may be closed

Timmay's picture

Truth is, there will be no exits. The masses will not be allowed to liquidate during a crisis. "Calm" will be restored and TPTB will determine what your daily allotment of cash will be going forward. The economic engine of capitalism was broken in 2008, capital no longer seeks the best returns at risk premium priced by the decisions of the many, it literally now seeks the regualtory and legal process of creating money out of thin air from the few. Funny things is, I don't know if there are "losses" anymore for the big banks, just wins now since they bought refs, the commissioner, own the league and make the rules now.

The final act of the Central banking coup over ALL world governments (except maybe Russia) is when ALL the doors close.

There will be no exits.

"The measure of a man's wealth is determined by how many assets he can place his hands on in 24 hours."  LDiB III

MonetaryApostate's picture

I feel sorry for the poor & middle class, all they have is money, while the wealthy steal their hard work for IOUs they never intended to repay...


mvsjcl's picture

"The idea, it seems, is to use borrowed cash to pay out investors rather than sell the underlying bonds..."


Christ Almighty! Don't they ever run out of games to play?

El Vaquero's picture

You sir, are an optimist.  The United States will be no more during my expected lifetime.

Seek_Truth's picture

"Central banking coup over ALL world governments (except maybe Russia)"


You aren't aware that Iran, NK, Cuba never had a Rothschild controlled Central Bank?

And that Russia  only recently got itself out from under the control of the Rothschilds?

And that China is working on it, through the AIIB?

And that makes it possible for all nations that join the AIIB to do the same?

Dame Ednas Possum's picture



I wonder.

Gold per chance?

Soul Glow's picture

Every once in awhile stocks go down 30% in a day and in the weeks that follow stocks continue crashing until yes they are down 80%.  This has happened several times on Wall Street in the past one hundred years even after the advent of the President's Working Group on Financial Markets which's job is to create the markets for maximum benefit.  What is maximum benefit you ask?  It is for the top banks to control the world for as long as possible.

tarsubil's picture

That big wave out in the ocean will never crest in a moment. It has been rolling out at sea and is only 1m high for a long time. The idea it will crest in a moment is ridiculous. Liquidity = Depth supporting wave

Dame Ednas Possum's picture

Huygen's Principle - a wave is the sum of the wavelets.

Super elevation i.e. wave crest/ dip convergence.

What happens when each wave (stocks/ bonds/ global monetary system/ soverign debt/ debt spending/ employment/ participation/ production/ oil price/ social unrest/ military action/ refugees/ immigration/ welfare/ corruption/ banking theft/ fascism/ nepotism/ cronyism/ oligarchy) is a tidal wave in itself...and they all converge?

A flock of black swans.

Hint...it ain't pretty.

Focus your binoculars. It's not a rain-cloud approaching.

Stuck on Zero's picture

If everyone starts selling bonds the Fed will buy them with cash.  The sellers will put the cash in the bank.  The bank will buy bonds from the Fed with the cash.  Problem solved.


Ham-bone's picture

There is no "market" anymore and there will be no "crash".  The numbers and blinking lights we see are centrally controlled and directed...

Allowing a "market" to re-emerge after having had it in an induced coma since '09 ain't gonna happen.  Welcome to the matrix.

The idea the Fed would start planting with rate hikes in the early portions of demographic winter just silly...


Oldwood's picture

They bought the market and own it.

What pisses me off is that for those of us who want nothing to do with this shit show, be it owned by the Fed or Goldman or anyone else, what they are doing will burn us all. The very currency we work to earn, the trade exchange that allows us to buy food and shelter is in their hands. Much as the States have lost their sovereignty by the Feds prolific debt and printing which gives them all powers over the states, so has each and every citizen lost their sovereignty.

It is WE that are owned.

KnuckleDragger-X's picture

So, 1929 was a one day event? Every reason for investing has disappeared. Now they play the casino, making bets on the turn of a friendly card. The real players are quietly moving toward the exits, but pretty soon the thundering herd of sheep will start noticing. I still think that bonds and it's ugly child, derivatives, will be the killer.....

Soul Glow's picture

 In 1987 on Black Monday the Dow Jones Industrial Average lost 22% of its value.  It fell another 22% by the end of October.  This event's initial day saw the vast majority of the correction, this because investors were caught flat footed, fat, and happy.

Dame Ednas Possum's picture

That was then...

This is now.

What's coming shit black Monday before breakfast.

Stlouiemike's picture

I beg to differ I started in June 1987 in Dean Wiiters broker program at the peak on 8/25/87 the dow was 2722 I started in production on 10/1 the dow had dropped to 2639 3% from the top by the 16th it dropped to 2264 another 14.9% by the endof the month the dow had actually risen from 1738 after the crash to 1993.  I will never forget that day sitting in front of the bunker watching it drop tick by tick and the looks on the older brokers faces.

rubiconsolutions's picture

What a bunch of crap. I trust that the Federal Reserve Bank and its members have learned from past mistakes and will not allow a major event to happen. If there is a correction it will slight because the central planners are much clearer now than in years past on how to control the economy.



/sarc. I think I just threw up a little in my mouth.

F0ster's picture

The liquidity is coming from your pensions people.

BI2's picture
BI2 (not verified) Jun 24, 2015 11:15 AM

When the unwind comes it will come because we failed to listen. George Washington warned us of the CURSE that would befall this country.


WTFRLY's picture

Maybe the fireworks will be a random banker or two jumping from a rooftop.

astoriajoe's picture

so they're going to borrow to pay investors back, creating a liability for themselves, which when the crash does happen, will ensure that they can't pay back the debt. I guess that's one way to go.

I'm imagining Wile E. Coyote taking planks from the beginning of a wooden bridge and adding them to the middle so that he can get across the canyon.

madbraz's picture

just my opinion, but i think it is ridiculous to put treasuries and bunds in the same category as corporate bonds.  it sounds like CNBC.


if the turd hits the fan, AAA designated government bonds will be heavily bid as always.  don't confuse speculation in futures market with iliquidity.  the vast majority of investors/holders of US treasuries are not selling and they will not sell at these levels.  fund managers will have to deal with that when they seek safe haven government bonds.  


look at the joke that is HYG and JNK junk bond ETFs.  those things have higher AUM than the treasury TLT.  the market for treasuries is orders of magnitude larger than the minuscule trading that takes place in junk bonds (less than 1% of outstanding bonds/day).  the price you see on junk bonds is fictional - the real price will appear when herds try to get out.


you do realize that we have the highest yields in the world for developed countries.  not coincidentally, we have the largest future/derivative market for our government bonds.  if we didn't have this casino, our yields would be 100 bps lower, at the least.  look at canada's 30 year bond, 2.4%! 





Oldwood's picture

Yes, the power of infinite debt and infinite printing.


Condor96's picture
Condor96 (not verified) Jun 24, 2015 11:26 AM
aliki's picture

every 7-8 years like clockwork since nixon took us off the gold standard.

there are those whoever who slept thru the internet crash & housing crash so you can understand their tone-deaf to a $19 trillion U.S. debt, $100 trillion + global debt.

just like internet companies that make no $$$ and people making $50,000 a year buying $1 million homes, it doesn't matter until it matters

Bighorn_100b's picture

If anyone asked in retrospect during the crash of 1929 what would they have done different. Most people responded saying I should have stocked up on the basics: sugar, coffee, flour, just a few examples of what we take for granted today.

My list includes:

Coffee, hard liquor, Silver, gold, rice, ammo, and friends that will watch my six.

bluskyes's picture

Salt should be one before sugar in your list.

buzzsaw99's picture

Investors, lulz.

You keep using that word. I do not think it means what you think it means. [/Inigo Montoya]