It’s Official, There’s No Bond Liquidity Crisis: Lisa Abramowicz

(Bloomberg) -- Here’s one thing you no longer have to worry about -- a liquidity crisis in corporate bonds. Because there isn’t one.

Or at least that’s the takeaway of research released Monday by New York Fed analysts, who’ve spent months studying the state of bond markets to determine where the weak spots lie.

Their findings show credit markets are actually evolving. And everything seems fine. Maybe even better than it was before the 2008 financial Armageddon, which prompted Wall Street banks to shrink and stop acting like hedge funds.

Now, actual hedge funds and others are stepping in and making markets, even as big banks pull back. Yes, companies can’t seem to sell enough corporate debt and yes, this means trading has failed to keep pace with debt issuance.

But volumes are picking up. It costs less to transact in the $8 trillion U.S. corporate-debt market than it did before the financial crisis, at least as measured by bid-ask spreads. And single trades are having less of an impact on market prices than they once did, the research shows.

Kumbaya. It’s all good. Yay.

Of course, there is a nagging feeling that this might not tell the whole story. William C. Dudley, the president of the New York Fed, suggested as much last month when he said, “A clearer picture on liquidity conditions may only emerge as monetary policy is normalized.”

He indicated that traditional measures of the market -- including those that the Fed analysts examined -- don’t provide a complete and final picture about the ability to transact in credit, especially during stressed times.

There is one conclusion that we can draw from this study by Tobias Adrian, Michael Fleming, Or Shachar and Erik Vogt, which was released as part of a bond-liquidity series on the Liberty Street Economics website.

The bond market may be deeply troubled, and may face a rocky road ahead. But the problems have less to do with the mechanics of each debt trade and more with years and years of monetary stimulus and the ensuing lopsided demand to buy credit.

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

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

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