Volckerized Wall Street Dumping Bonds With Rest of Herd

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Corporate bond values are swinging the most in more than a year and here’s one reason why: Wall Street’s biggest banks are following the crowd and selling, too.

Take junk bonds, which have lost 2 percent in the past month. Dealers, which traditionally used their own money to take bonds off clients desperate to sell during sinking markets, sold about $2 billion of the securities during the period, according to data compiled by Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Banks have cut debt holdings in the face of higher capital requirements and curbs of proprietary trading under the U.S. Dodd-Frank Act’s Volcker Rule. Their lack of desire to take risks has had the unintended consequence of exacerbating price swings amid the rout now, said Jon Breuer, a credit trader at Peridiem Global Investors LLC in Los Angeles, California.

“There just isn’t the appetite and ability to warehouse the risk anymore,” he wrote in an e-mail. “Everyone is afraid to catch the falling knife.”

High-yield bonds have lost 1.1 percent this month, following a 2.1 percent decline in September. That was the worst monthly performance since June 2013 for the $1.3 trillion market that’s ballooned 82 percent since 2007, according to the Bank of America Merrill Lynch U.S. high-yield index.

Oil Prices

Debt of speculative-grade energy companies has been particularly hard hit along with oil prices, tumbling 3.4 percent this month with relatively few buyers willing to step in to mitigate the drop. For example, notes of oil and gas producer Samson Investment Co. have lost 25 percent since the end of August.

The market’s indigestion was brought on by many reasons: signs of a global economic slowdown, Ebola spreading and concern that U.S. energy companies will struggle to meet their debt obligations after financing their expansion by issuing bonds.

Wall Street’s been selling even as analysts at firms from Morgan Stanley to Goldman Sachs Group Inc. recommended investors buy junk securities in the past few weeks. The 22 dealers that do business with the Federal Reserve reduced their net holdings of high-yield bonds by $1.7 billion in the two weeks ended Oct. 8 to a net $6.3 billion, Fed data show.

Prior Downturns

While big banks have been unwilling to add riskier debt in this selloff, they’ve been buyers in previous downturns. In November 2011, amid an escalating European sovereign debt crisis, primary dealers added $4.6 billion of corporate bonds to their coffers, Fed data show. That month, the dollar-denominated notes lost 1.9 percent.

In December 2011, the debt rebounded, gaining 2 percent, and the banks sold $7.4 billion of their holdings.

Prices will probably keep swinging until it looks like the global economy’s regaining its footing. Or until investors gain faith that central banks can save the day, once again.

Just don’t count on Wall Street dealers to prop up the market. Those days appear to be over.

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