BlackRock Inc. Vice Chairman Philipp Hildebrand warned that some credit markets may be at risk of seizing up after leaders including JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon signaled concern about a shortage of U.S. Treasuries.
“What we’re trying to say to our clients: be aware that what you think is very liquid, may not be very liquid when you need it,” Hildebrand, 51, told Bloomberg Television’s Manus Cranny in an interview in Davos, Switzerland, on Thursday. “The question is if liquidity is properly priced, rather than a liquidity crisis” in the current market, he said.
Dimon, in a letter to shareholders last week, called a roller-coaster day in Treasuries on Oct. 15 a “warning shot” to investors, blaming it partly on central-bank hoarding of bonds. International Monetary Fund Managing Director Christine Lagarde has said the world could be in for a “bumpy ride” when the Federal Reserve starts raising interest rates.
While the size of the U.S. bond market has swelled 23 percent since the end of 2007 through the end of last year, trading has fallen 28 percent in the period, Securities Industry & Financial Markets Association data show, as regulators, seeking to reduce risk, have made it less attractive for banks to hold an inventory of tradeable bonds.
“The challenge is that we have an unprecedented monetary policy environment,” said Hildebrand, who was head of the Swiss central bank before joining BlackRock in 2012. Investors face “uncharted territory. We have plenty of liquidity. It’s very hard to tell what will happen when normalization comes.”
Fed policy makers said last month that a rate increase at their next meeting on April 28-29 “remains unlikely.” The central bank’s preferred measure of inflation has been running below its 2 percent target for almost three years.
“Nobody knows when it’s going to happen,” Hildebrand said, when asked about a Fed increase. “What we know for sure is that there will be a lot of debate around it until it happens.”
“Investors should be aware of the fact that their liquidity assumptions formed over the last couple of years may not be what they may encounter when they need it,” Hildebrand said.