Just over a year ago, we warned on the very real concerns about corporate bond liquidity drying up and the potentially huge problems associated with that, if and when the Fed ever pulls the rug out from the one-way street of free-money injections. It appears, as Bloomberg reports, having realized, we suspect, that they can't get out of their positions, the world’s largest money manager, Blackrock, believes the corporate bond market is "broken" and in need of fixes to improve liquidity "before market stress returns." Ironically, as we have also explained in great detail, it is this 'broken' market that has enabled corporations to borrow cheap enough to buyback half a trillion dollars of their stock in 2014.
As we discussed in great detail here, Federal Reserve intervention has had dramatic unintended consequences in the bond markets...
First, how does one define liquidity? Here is how the smartest guys in the room (and Matt King truly is one of the smartest guy) do:
As the chart points out, the biggest falacy constantly perpetuated by market naivists, that liquidity and volume (in this case in fixed income) are one and the same, is absolutely wrong.
The TBAC's conclusion: the longer central planning goes on, the less the actual large "block" trades, and even those are getting smaller.
The blue text above is self-explanatory: the slightest gust of wind, or rather volatility, threatens to shut down the secondary corporate bond market, which already is running on fumes.This can be seen in the final chart of this post which confirms that the Fed is succeeding... to its paradoxical chagrin! Because the more pure liquidity moves to the (Fed-backstopped) Treasury market, the more investors are moving away from the most liquid instruments.
In other words, while the Fed, and the TBAC, both lament the scarcity of quality collateral and liquidity in non-Fed backstopped security markets, it is the Fed's continued presence in the (TSY) market in the first place, that is making a mockery of bond market liquidity and quality collateral procurement.
And without faith in a stable credit marketplace, there is no way that a credit-based instrument can ever truly become the much needed "high quality collateral" to displace the Fed's monthly injection of infinitely funigble and repoable reserves (most benefiting foreign banks).
And now - as Blackrock realizes that its massive (and likely levered) positions face a dramatic liquity risk cost if they are ever to 'realize' any gains from the Fed's handouts (by actually selling), they cry foul and proclaim the bond markets "broken" and in need of government fixes...
BlackRock, the world’s biggest money manager, said the marketplace for corporate bonds is “broken” and in need of fixes to improve liquidity.
BlackRock, a major competitor in the bond market with $4.3 trillion in client assets, urged changes including unseating banks as the primary middlemen in the market and shifting transactions to electronic markets. Another solution BlackRock proposed: reducing the complexity of the bond market by encouraging corporations to issue debt with more standardized terms.
Banks have retained their stranglehold on corporate debt trading despite years of effort by BlackRock and other large investors to eliminate their oligopoly. The top 10 dealers control more than 90 percent of trading, according to a Sept. 15 report from research firm Greenwich Associates. To BlackRock, the dangers of price gaps and scant liquidity have been masked in a benign, low interest-rate environment, and need to be addressed before market stress returns.
“These reforms would hasten the evolution from today’s outdated market structure to a modernized, ‘fit for purpose’ corporate bond market,’” according to the research paper by a group of six BlackRock managers,
Standardization would allow more trading to occur on exchanges and other electronic venues, and would help stabilize markets in periods when investors rush to sell bonds, Gallagher said. The risk posed by investors trying to dump bonds after the Federal Reserve raises interest rates is “percolating right under” the noses of regulators, he said.
* * *
So there it is - the truth carefully hidden - Blackrock is in full panic mode knowing that the game-theoretical first-mover advantage does not apply to their selling down their positions since they are simply too large... so we need to "fix" liquidity and standardize markets (to enable easy risk transfer to retail pension funds) or the Mutually-Assured-Destruction card will be played once again.
* * *
Of course, while they are correct in terms of liquidity (for a concerted exit of bond positions), we did not hear them complaining as cheap primary borrowing enabled half a trillion dollars of buybacks in 2014...
to sustain the mirage of economic growth via the stock 'market'...
* * *
This is of course just another canary in the coalmine that confirms trouble ahead in the corporate bond market - as we have discussed at length...
* * *
While the 'market' impact of these facts is potentially economically devastating in its reality-endgame of bursting over-inflated buy-back-driven asset-bubbles, the traders and bankers themselves have also been crushed (schadenfreude-istically for many), as Bloomberg reports,
As trading in dollar-denominated bonds declined 22 percent in the past five years to an average daily $809 billion, so have the jobs, leaving even some of the most senior traders and salesmen moving from firm to firm. Dozens of journeymen are populating an industry that used to attract the young in throngs, lured by money and prestige, according to Michael Maloney, president of fixed-income recruiting firm Michael P. Maloney Inc.
“The business model is broken and 50 percent of the people in our world who are in trading are stuck right now,” Maloney said in an interview in his New York office.
For every 10 of them there’s going to be three or four left,” he said. “What’s the timeframe? Well, everybody I know is looking for a job -- not looking for a job, looking for a career.”
“It’s surprising how quiet a place could be compared to what I had known,” said Stein, who began trading bonds in 1985.
* * *
See what happens, Janet, when you screw with the 'market'?