Human Bond Traders Barely Show Up To Work As Machines Take Control

There’s nothing like a little complacency to make an already precarious situation even more precarious and if IG volumes are any indication, bond traders are getting mighty bored. As a reminder, the current environment in corporate credit — which Gundlach deputy Bonnie Baha recently described as offering one of the “most unattractive risk/return propositions” she’s ever seen — doesn’t offer much in the way of opportunities as central banks have succeeded in herding so many yield-starved investors into IG and HY (i.e. away from government debt which in the best case yields you nothing and in the worst case will guarantee you a loss) that spreads are pitiably low. 

Meanwhile, the new regulatory regime has done an admirable job of making the system “safer” by encouraging dealers to shrink their inventories, meaning that while we’re all safe from evil prop traders (because we’re sure prop trading is dead and the Goldmans (GS) of the world didn’t find a way around Volcker the very instant it was proposed), secondary market liquidity has evaporated, meaning the door to the proverbial crowded theater is getting smaller even as the number of yield seekers inside is getting larger so when someone finally yells fire, well, let’s mix our metaphors here and say we’re all up a creek. 

Given the above, it’s not terribly surprising that bond traders have, in Barclays’ words, made “Monday the new Friday.” Here’s more (from a Friday note): 

Activity in credit was muted this week. Investors were slow to return to trading from the Easter holiday, and volumes were sharply lower in the first part of the week. A slow start to the week has become customary, as Monday appears to have become the new Friday. According to year-to-date TRACE data, average investment grade volumes are the same on the first and last days of the week, and Friday volumes are actually 20% higher than Monday volumes for high yield. But the first three days of this week were extreme even in that context, as investment grade volumes were 21% lower than the year-to-date average for the first three days of the week and high yield experienced a 15% drop.