Changes in the Market

eric-gerster-bond-marketIn regards to bond markets, one thing has been growing in popularity and in the newspapers, that one thing is liquidity. Investors, traders, and regulators are now constantly thinking about the ability to trade fixed-income securities without affecting prices too much. There are however plenty of people that disagree with the liquidity issue in this situation.

According to new regulations that have been enacted, it has become more and more difficult and expensive for banks to hold bolds on their balance sheets. It is also expensive and difficult to facilitate trades for their clients in certain areas, but the major growth of the investors that would and do buy these types of assets is another factor to consider.

Citigroup has recently published a new report based on the liquidity issue which argues the issue being a something that expands beyond fixed income and cannot be only attributed to the shrinking bank balance sheets. The presentation is a whopping 42 pages of information the Citigroup Strategist Matt King conducted and displays his view on the positioning of large investors as a major variable behind the current liquidity issue.

King’s argument centers around the data surrounding the fact that markets used to be “self-limiting” and prices of securities would go up to a certain point whereupon their yield would become unattractive. At this point investors would cut some of their positions and have the prices decrease as a result forcing the yields to recover. Now however the strong search for returns has skewed this idea where investors now chase inflows so they can get higher prices and higher profits.

King goes on to exclaim that investors are starting to move together where they did not used to move together thus causing many markets to become more homogeneous. The basic essence of the report and King’s point of view circles around the fact that investors that work with different asset classes are being attracted to different things as the one-way positioning continues to control.


Thanks for reading!

Eric Gerster