Citigroup: Something Big and Fundamental Has Changed in Markets
2015-08-12 12:36:52.466 GMT
By Tracy Alloway
(Bloomberg Business) -- Liquidity in bond markets has
grabbed all the headlines in recent months (and years).
The ability to trade fixed income securities without overly
impacting prices is front and center in the minds of many
investors, traders and regulators, though there's plenty of
disagreement as to the extent of the so-called liquidity issue
and the reasons behind it.
New regulations that have made it more difficult or more
expensive for banks to hold bonds on their balance sheets and
facilitate trades for their clients are an oft-cited culprit,
though the growth of the big investors who buy such assets is
another factor.
In a new presentation, Citigroup Strategist Matt King
argues that the liquidity issue is a pervasive one that expands
beyond fixed income and cannot be solely attributed to shrinking
bank balance sheets.
In the 42-page presentation, King points to increasing
concentration and one-way positioning by large investors as a
major factor behind current liquidity woes.
The crux of this argument is that markets used to be self-
limiting. Prices of securities would move up to a point where
their yields would become unattractive, at which time investors
would leave trim some of their positions, causing prices to go
down and yields to recover. Now the intense search for returns
has altered that dynamic, with investors chasing inflows as a
means of getting higher prices and higher profits.
While the notion of value investing disappearing in a
market that has moved ever upwards for the past five years is
not exactly new, King's presentation here is stark. Investors
have been moving in tandem, he says, making markets far more
homogenous. The below shows investor positioning in credit
markets, where the number of longs has vastly outnumbered the
shorts, as well as the International Monetary Fund's herding
metric. In short, investors across a number of asset classes are
going mooo as one-way positioning dominates.
When investors decide to change positions all at once,
liquidity understandably, evaporates.
The good news here is that some of that herding behavior
may fall to the wayside as the U.S. raises interest rates,
global economies begin to diverge and cracks emerge within asset
classes. The bad news is we're vulnerable to hitting market air
pockets, so to speak, until then.
Here's King's conclusion:
Buckle up.
To contact the author on this story:
Tracy Alloway at talloway@bloomberg.net
To contact the editor on this story:
Joe Weisenthal at jweisenthal@bloomberg.net
2015-08-12 12:36:52.466 GMT
By Tracy Alloway
(Bloomberg Business) -- Liquidity in bond markets has
grabbed all the headlines in recent months (and years).
The ability to trade fixed income securities without overly
impacting prices is front and center in the minds of many
investors, traders and regulators, though there's plenty of
disagreement as to the extent of the so-called liquidity issue
and the reasons behind it.
New regulations that have made it more difficult or more
expensive for banks to hold bonds on their balance sheets and
facilitate trades for their clients are an oft-cited culprit,
though the growth of the big investors who buy such assets is
another factor.
In a new presentation, Citigroup Strategist Matt King
argues that the liquidity issue is a pervasive one that expands
beyond fixed income and cannot be solely attributed to shrinking
bank balance sheets.
In the 42-page presentation, King points to increasing
concentration and one-way positioning by large investors as a
major factor behind current liquidity woes.
The crux of this argument is that markets used to be self-
limiting. Prices of securities would move up to a point where
their yields would become unattractive, at which time investors
would leave trim some of their positions, causing prices to go
down and yields to recover. Now the intense search for returns
has altered that dynamic, with investors chasing inflows as a
means of getting higher prices and higher profits.
While the notion of value investing disappearing in a
market that has moved ever upwards for the past five years is
not exactly new, King's presentation here is stark. Investors
have been moving in tandem, he says, making markets far more
homogenous. The below shows investor positioning in credit
markets, where the number of longs has vastly outnumbered the
shorts, as well as the International Monetary Fund's herding
metric. In short, investors across a number of asset classes are
going mooo as one-way positioning dominates.
When investors decide to change positions all at once,
liquidity understandably, evaporates.
The good news here is that some of that herding behavior
may fall to the wayside as the U.S. raises interest rates,
global economies begin to diverge and cracks emerge within asset
classes. The bad news is we're vulnerable to hitting market air
pockets, so to speak, until then.
Here's King's conclusion:
Buckle up.
To contact the author on this story:
Tracy Alloway at talloway@bloomberg.net
To contact the editor on this story:
Joe Weisenthal at jweisenthal@bloomberg.net