Bond Market Liquidity, Regulation, and The Public Interest August 3 rd Teleconference Americans for Financial Reform Marcus Stanley, Policy Director marcus@ourfinancialsecurity.org
Bond Issuance Looks Healthy…. Net Non-Financial Corporate Bond Issuance As Percent of GDP 3.0% 2.5% 2.0% 25 Year Average -- 1.25% 1.5% 1.0% 0.5% 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Americans for Financial Reform -0.5%
Bond Spreads Look Healthy… US Corporate BBB Option Adjusted Spread
Treasury Rates Lowest In History, On Very High Issuance 5 Year Treasury Constant Maturity Rate
So What’s The Problem? • Internal market ‘plumbing’ in some markets • Some markets show declines in average trade size – more trades to move the same dollar volume. • No decline in overall secondary market trading – but some decline in the ratio of trades to outstanding. – But why should we expect trading volumes to grow with outstanding securities? • Decline in balance sheet capacity for bank dealers. • Several anomalous trading days in bond markets.
Questions • Transactional liquidity: Do internal market issues interfere with the flow of credit to the real economy – so far they have not seemed to. • Systemic liquidity: effects during market stress? – Could a lack of ‘shock absorption’ capacity lead to more rapid price declines during a sell-off? – Anomalous trading days -- are these blips driven by electronic trading? How worried should we be given that they did not have a systemic impact? • What are the implications for regulation?
Regulation: Allow a Return to the ‘Good Old Days’? Bank And Dealer Non-Government Bond Inventories Includes non-GSE MBS, CDOs, Corporate Bonds, Foreign Bonds. Millions of $ 1,600,000 9.00% 8.00% 1,400,000 7.00% 1,200,000 6.00% 1,000,000 5.00% 800,000 4.00% 600,000 3.00% 400,000 Private depository institutions 2.00% Total Including Broker Dealers 200,000 1.00% Total As Percent of Assets (Right Axis) 0 0.00% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Americans for Financial Reform 7/2015
Regulation: Or Address Emerging Risks? • Predatory electronic trading. • Liquidity management and stress testing by asset managers and funds. • These are on the regulatory agenda, but we have yet to see results.
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