Global Bond Markets: Where Did All The Liquidity Go?

Why does the lack of liquidity in bond markets have many of the world’s top economic opinion-makers worried?  Ben Wright writing in the Telegraph reports on the voices in “the chorus of doom” and explains why the evaporation of this liquidity in the global fixed income market signals “a warning shot across the bow”.

Where did all the liquidity go? Photo: Ryan Brennecke

“Every market is a tug-of-war between buyers and sellers. Liquidity is a gauge of both the size of the market (the number of buyers and sellers) and its depth (the number of buyers and sellers of both small and large amounts of securities). Why is the depth of the market important? Because you’re sure to find plenty of willing buyers if you want to sell £10,000 of government bonds. But if you want to sell £100m-worth, it might be a touch harder.”

“The less liquidity there is, the greater the impact large trades will have. If lots of people are all trying to sell lots of stuff at once, it could get messy.”

Since the financial crisis, global financial regulators have rightly been attempting to make banks safer. They have done this by, for example, banning proprietary trading, making it harder to lend government bonds in the repo market and, most importantly, forcing banks to deleverage.  One of the upshots is that it is now much more expensive for banks to hold securities on their own books and therefore provide liquidity in the market. Deutsche Bank recently noted that the amount of outstanding corporate bonds has doubled since 2001 but dealer inventories of these securities have fallen 90pc over the same period.

Read the full article “The world’s multi-trillion dollar bond market is circling the drain” in the Telegraph.

Ben Wright is Group Business Editor at The Telegraph. He was previously the City Correspondent at The Wall Street Journal and before that Editor of Financial News.  Follow him on Twitter.

Read also:

“As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases.  This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.”
Nouriel Roubini in “The Liquidity Time Bomb”