Goldman Contrarian Joins Chorus Warning on Bond-Market Liquidityby
Latest bad omen: dealer corporate-debt inventories go negative
That light at the end of the tunnel? It might be `a train'
Add Goldman Sachs Group Inc.’s chief credit strategist to the list of market participants concerned about bond-market liquidity.
Charles Himmelberg joined the chorus as the inventory of corporate bonds held by the Federal Reserve’s 22 primary dealers fell below zero last week for the first time, according to Goldman Sachs.
While corporate-bond inventories have plunged since the financial crisis as tougher regulations made it more expensive for banks to hold riskier assets, the dip to lowest in Goldman Sachs data represents a milestone signaling a "new normal" of coming illiquidity, according to bank strategists.
"I was somewhat of a contrarian about the liquidity worries, but the evidence is starting to pile up," Himmelberg said Tuesday. "The trend reflects the rising cost of holding corporate-bond positions. This looks increasingly like a growing headwind that will be with us for some time."
The primary dealers have a net short position, or bets prices will fall, on corporate bonds of $1.4 billion. That’s down from a net positive of $13 billion as recently as May, according to data compiled by Bloomberg.
Goldman is the latest in a string of investors and Wall Street executives -- from JPMorgan Chase & Co.’s Jamie Dimon to Richie Prager, head of global trading at BlackRock Inc., the world’s largest money management firm -- to raise red flags this year that banks can no longer act as market makers and step in to buy when investors sell.
The concern has been amplified as the Fed readies the first step in ending an easy-money policy that has sparked an explosion in the market for corporate bonds, pushing more investors into higher-yielding debt, with companies selling more than $8.5 trillion of U.S. dollar-denominated bonds in the past five years.
Corporate bonds have lost 0.4 percent this year, following six straight years of gains, according to Bank of America Merrill Lynch Indexes.
"It’s been manifest in repricing the market in the last year," Himmelberg said. "I don’t think we would have seen as much as we saw without the liquidity concerns in the back of people’s minds."
Not everyone agrees. Krishna Memani, who oversees $220 billion as the chief investment officer at Oppenheimer Funds Inc., said lower dealer inventories of bonds are the "worst evidence" to look at to determine the ease of a transaction.
"Dealers don’t provide liquidity, investors do, and they remain in a buying mood," Memani said. "If you want to sell bonds, you can. Easily. There are people to buy. Just because dealers aren’t making as much money doesn’t mean it’s getting harder to transact."
Researchers at the Federal Reserve Bank of New York dismissed concerns of an impending liquidity crisis last month, saying the market had shifted and liquidity was “not exclusively provided by dealers but also by other market participants, including hedge funds and high-frequency-trading firms.”
John Lekas, founder and chief executive officer at Leader Capital Corp., remains unconvinced other players in the market will step up for the primary dealers.
"As dealers back away, there are real questions about who will fill that hole -- the market still hasn’t appreciated the liquidity risk," said Lekas, who manages $1.1 billion at Portland, Oregon-based Leader Capital. "The light at the end of the tunnel is a train."