RBS have joined the chorus of concerns about dangers in credit markets from thin trading volumes and a lack of risk takers making markets.
The bank also, it turns out, has a measure for trading lubricacity:
Our Liquid-o-Meter shows liquidity in the credit markets has declined around 70% since the crisis, and it is still falling. We define liquidity as a combination of market depth, trading volumes and transaction costs: all have worsened. We also measure the premium for illiquidity: it is at a record low, meaning investors are not getting paid to take liquidity risk.
More on the topic of liquidity, which we’re choosing to understand as the ability to buy or sell when you want to without paying a lot for the privilege. Markets composed of rational, or at least reasonably calm, buyers and sellers. That sort of thing.
From San Francisco comes a video of JP Morgan’s Jan Loeys, shot in the straight-to-camera style of a 1970s news bulletin which lends the whole thing a certain gravitas. The message is to think about liquidity, and to prepare for its possible absence. Read more
Earlier this month South Korea sold $1bn of US dollar denominated debt due in June, 2044.
Issued at a spread of 72.5 basis points over a 30-year Treasury, eager buyers have since pushed the spread down to just 46 basis points. Such is the demand for income in any form.
Some might wonder if there will be periods in the 2020s, or 2030s even, when the owner of such a bond might wish they had bought, for only half a percentage point less, securities which trade in a market of far greater depth. Read more
You may detect a sceptical tone there, but the question is real: does it matter if something unexpected occurs in the world of credit and rates?
We’ve been on this point for a while — assessment of risk is sticky, until it’s not — but were struck by a recent conversation with a market maker about his clients:
Everyone is acting like an LTCM.
Some broad thoughts on the economic and market cycle arrive from Nikolaos Panigirtzoglou and team at JPMorgan, to help active investors (most of them, it seems) who are scratching their heads and looking perplexed.
Despite range trading and low market volatility, active investors feel extremely uncertain about markets. Very few have beaten their benchmarks and our model portfolio also is barely in the black YTD.
Some charts will help below but the central question is why, five years into a US expansion, have bonds not sold off more? Read more
The markets have run a bath, lit candles and reached for a favourite palliative.
So says the Cleveland Financial Stress Index:
During the federal government shutdown in October 2013, the CFSI was in Grade 2 or a “normal stress” period, but as the year progressed the index moved into Grade 1, indicating a “low stress” period. As of January 14, the index stood at −1.833, substantially below the CFSI’s historic high reading of 3.094 on December 29, 2008 and slightly above the CFSI’s historic low of −2.023 on January 9, 2014.
Something has been nagging at us this month — why were there so few market nerves apparent ahead of the possibility of a US government default, if the debt ceiling wasn’t lifted?
Not because we have any fresh insight into the chances of a political-cum-financial crisis in the US, but for what it says about a concept we think may describe much of the current situation in markets: sticky risk. Read more