Bond Floors Empty as Waning Risk Appetite Adds to Lull

It just doesn’t pay to try to be a superhero in the bond market right now.

The potential gains are increasingly small on the most-popular notes, such as U.S. Treasuries. Meanwhile, sentiment is souring in more speculative corners, like Russian bonds and high-yield U.S. debt.

So, many are simply waiting for a more inspiring time to place their bets. Trading in U.S. government bonds has dropped 25 percent in the past few weeks from the comparable period last year, according to Federal Reserve data. Investment-grade (NTMBIV) and junk-bond trading have plunged 17 percent and 8 percent, respectively, since the end of the second quarter, according to Financial Industry Regulatory Authority data.

“Looking forward, we expect listless, mostly sideways trading” for the rest of the summer, Wells Fargo & Co. (WFC) analysts wrote in a July 22 report.

This means that, for one, it’s harder for investors to shuffle their portfolios even if they want to because there are fewer people out there looking to sell or buy. And, two, this eats into bond dealers’ already waning trading revenues.

Adding to the summer doldrums is a declining volume of corporate-debt sales. Companies have sold an average $22.7 billion of dollar-denominated bonds each week this month, compared with an average $36.2 billion per week in June, according to data compiled by Bloomberg. Investors typically transact more frequently in bonds that have been sold within the prior few months.

Risk Aversion

While trading generally slumps at this time of the year, investors are particularly wary of making big moves right now with yields on debt globally at 1.7 percent, about 0.2 percentage point from the all-time low.

“We’re probably almost as risk averse as we were back in 2007,” Jerry Cudzil, head of U.S. credit trading at TCW Group Inc., said yesterday in a Bloomberg Television interview with Stephanie Ruhle and Erik Schatzker.

The global economy still isn’t growing as quickly as policy makers would like even after central banks funneled trillions of dollars into financial markets. Furthermore, with conflicts escalating in Gaza and Ukraine, investors aren’t in the mood to delve into more-speculative debt.

So take a long lunch, catch up on your reading or just leave early. You probably won’t miss much in the market.

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Caroline Salas Gage, John Parry

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