The topic of collapsing bond market liquidity (and in many cases, volume) is not new: It has been covered here for over 3 years, as we observed the amount of 10 Year equivalents soaked up by the Fed week after week and month after month, to the point where even the Treasury department agreed that in its quest to soak up “high quality collateral”, the Fed is making the bond market dangerously illiquid. It got so bad that in the fourth quarter of last year, the US banks posted the worst collective results across what is typically their most lucrative, Fixed Income Currency and Commodity division, since Lehman.
And yet while the bond market may have gotten so fragmented in recent months that even Bloomberg was amazed at how little trading volume it necessary to make a price impact, the amount of bond traders (and certainly salesmen), and certainly their bonuses, appeared to only go up. “Appeared” being the key word, however, because as Bloomberg reports, “the average number of dealers providing prices for European corporate bonds dropped to a low of 3.2 per trade last month, down from 8.8 in 2009, according to data compiled by Morgan Stanley.”
Curiously, what is happening in the bond market is comparable to parallel developments in stocks, where an ever smaller group of companies, with an ever greater market cap (here’s looking at you AAPL, AMZN and V), determines the leadership of not only the NASDAQ and the DJIA, but the entire S&P500 itself: a phenomenon we dubbed the “CYNK market“, in which prices keep rising on lower and lower volumes, until eventually the selling begins, and since there is nobody to buy (and certainly no shorts left to cover), and hence no liquidity, trading in the security is halted indefinitely, making sure those paper gains remains such in perpetuity.
Bloomberg cuts to the chase:
The decline in trading is making it harder for investors to buy and sell company securities, raising concern that it will be difficult to get in and out of positions in times of market stress. Regulations introduced since the financial crisis, and meant to reduce risk-taking, are eroding the financial rewards of trading and prompting banks to reduce their inventories of securities.
