Tags: Bank | Merrin | Newmark | El-Erian

Could the Bond Market Be Transformed?

By    |   Tuesday, 19 May 2015 12:30 PM

One of the most intriguing story lines of this market has been how it is going to cope with the imbalances that the Treasury and Federal Reserve, which are supposed to be stewards of financial stability, have themselves created.

In an interview with CNBC, Seth Merrin, CEO of Liquidnet, laid out a specific problem that looms over the bond market —the dealer bankers who control it have less than a fifth of the capital that would traditionally maintain the market, at the very same time that the issuance of corporate bonds is booming to take advantage of low interest rates. The Bank of England has responded by calling upon bond funds to hold more liquidity, and the interviewer responded by pushing back in the same manner that U.S. funds have resisted calls that they maintain a modicum of liquidity: "How dare you?" because after all, investors see any provision of reserves as dead weight.

Merrin explained that Liquidnet is preparing to operate what amounts to a central liquidity facility to head off the impending rush of investors to sell bonds whenever rates eventually rise or perhaps spike. Merrin is concerned about the potential for systemic instability when this occurs, because he fears that liquidity will dry up and spreads will widen even beyond the current 60 basis points or so. One wonders how Merrin has processed the prospect that the Fed would simply buy the illiquid bonds for its own portfolio, but the Liquidnet facility seems to offer a private-sector response that would reduce the risk that such a crunch in the bond market will touch off the inevitable next episode of the financial crisis.

Evan Newmark of CNBC elaborated on a point raised by Merrin that investors are starting to realize that they can lose money in bonds, as yields have risen and prices have fallen, so the bond market has become the lead story. Newmark stressed that the losses can happen quickly and investors are starting to ask, "If everybody runs for the door, where do I want to be?"

Tim Seymour, CNBC's emerging markets contributor, opined that Europe's quantitative easing is now the driving force and central bank liquidity is still supporting a carry trade.

Some further sage advice on liquidity risk in financial markets came Monday from Mohamed El-Erian, who told CNBC that while the situation in Greece could get out of hand, "the markets are focused on the amount of cash coming in," including from central banks "that are getting even more dovish," while the situation in Greece "is going to be contained and isolated." When interviewer Josh Brown suggested Greece had successfully "kicked the can," El-Erian cautioned, "You can't kick the can for the global economy as a whole, and that's the problem, which is that the longer we are in this 'new normal' of low growth, the longer that the equity market is driven by cash as opposed to fundamentals, the higher the risk of financial instability down the road."

Regarding the state of bank stocks, Fred Cannon, an analyst from Keefe, Bruyette & Woods, tracks a shrinking of the largest banks back to the size of 2000, a trend he sees as opening up opportunities for nonbanks to chip away at the business. Cannon told CNBC the process is "a death by a thousand cuts" as banks experience higher capital requirements and regulation. He mentioned Citi (C) and Bank of America (BAC) as large banks that on net are slowly divesting but still controlling two-thirds of the nation's financial assets.

© 2017 Newsmax Finance. All rights reserved.

 
1Like our page
2Share
Robert-Feinberg
One of the most intriguing story lines of this market has been how it is going to cope with the imbalances that the Treasury and Federal Reserve, which are supposed to be stewards of financial stability, have themselves created.
Bank, Merrin, Newmark, El-Erian
589
2015-30-19
Tuesday, 19 May 2015 12:30 PM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved