(Bloomberg) — On the surface, the corporate bond market appears more stable and liquid than ever. In the US market, trading volume in September hit a record high.
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But history has shown us that the ability to trade smoothly only exists until we need it. The International Monetary Fund warned this week that tighter spreads are increasing the risk of sudden repricing of credit.
Blair Shwed, head of fixed income sales and trading at U.S. Bank, said trading volume typically increases when investors seek risk. Securities that are relatively easy to sell also help asset managers limit losses and redeem them by returning cash to investors when the market sells.
“What I’m concerned about is a kind of self-fulfilling prophecy where everyone thinks liquidity is good and it’s only going to get better,” Shwedo said in an interview Wednesday. “Will this lead us to the point where the music stops and we see a dramatic deterioration because everyone believes that liquidity is really good?”
Credit spreads at this point show that bond markets are perfectly priced in the strong outlook for the U.S. economy and the potential for further policy easing by the Federal Reserve. That makes them more vulnerable to rapid repricing if volatility spikes, as in the aftermath of November’s presidential election.
Shwedo sees no immediate signs of liquidity deterioration absent exogenous shocks. The rise of electronic trading, portfolio trading and exchange-traded credit funds means dealers have more ability to quote prices than they did in 2020, when the pandemic disrupted markets, he said.
As electronic credit trading advances, platforms such as MarketAxess Holdings Inc. and Tradeweb Markets Inc. are gaining popularity, and more non-bank companies are opening marketplaces. More users means more liquidity and more orders.
This made September the biggest month on record for U.S. investment-grade trading, with average daily trading volume exceeding $43 billion, according to Bloomberg Intelligence. Based on data from the Greenwich Union, 50% of high-end bond trades in September were done electronically.
Portfolio trading, where investors buy and sell blocks of bonds in one or two trades, is now a key driver of smooth trading ability, according to Barclays. Analysts led by Dominique Toubran said in a note last week that this trade has grown rapidly in recent years, rising from virtually 0% in 2018 to 25% of dealer-to-customer volume in September. I wrote that I did it.
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But the IMF warned this week that the rise of non-bank financial institutions means “market liquidity availability in times of stress is in question.”
Anxiety about elections
Investors take comfort from being able to move bonds easily and cheaply, but prolonged vote counting, contested results, or fiscal surprises can force buyers to bid in volatile global markets. You may have trouble finding your way.
“We never know what this election will ultimately be like. We don’t know what volatility they will bring,” said Jonny Fine, global head of investment-grade debt at Goldman Sachs Group. He also talked about presidential voting in general.
A liquidity squeeze can be caused by a variety of factors, said Brian Meehan, an analyst at Bloomberg Intelligence. He worries that macro indicators could change and confidence in strong economic growth could be shaken, that Donald Trump could win the election and enact punitive tariffs that would accelerate inflation, or that more zombie companies could refinance. He said he could suffer from this.
“It looks like a disaster is brewing,” he said in a phone interview Wednesday.
1 week review
Boeing Co. is looking to shore up its balance sheet after the troubled aircraft maker reported that it expects to run out of cash in 2025, according to research analysts at Bank of America. The company is likely to raise $20 billion in equity.
Defaults in a murky corner of China’s local bond market have soared to record highs, ensnaring investors who assumed their securities had implicit guarantees from the state. The number of failures of so-called non-standard products, which are fixed-income investments that are not publicly traded, has soared to record levels.
Investors are stocking up on European junk bonds at the fastest pace in three years, betting that interest rate cuts in the region will outpace those in the United States.
In the U.S. corporate bond market, prices suggest the outlook for blue-chip companies is brightening. But derivatives traders don’t seem so convinced. The divergence may be a sign that investors are wondering how much corporate bonds have risen in value relative to U.S. Treasuries in recent weeks.
Procter & Gamble tied its own record for selling 10-year U.S. corporate bonds with the narrowest spread over comparable U.S. Treasuries.
Banks and private credit companies are competing to provide at least $5 billion in debt financing to support Bausch & Lomb’s potential acquisition.
Chinese regulators are cracking down on fraud in the world’s second-largest corporate bond market, aiming to reduce financial risks. According to a statement dated October 18, the country’s securities regulator announced that it had suspended corporate bond underwriting operations for Central Securities and Kaiyuan Securities for six months.
Companies borrowed a record $1 trillion in the U.S. leveraged loan market this year, helped by repricing that lowers the cost of borrowing risky debt.
Corporate bond investors are facing debt losses from Tapestry’s failed acquisition of Capri Holdings. This is because the company may aim to redeem the $4.5 billion it borrowed to finance the acquisition.
Analysts at Goldman Sachs Group Inc. and BNP Paribas are predicting an end to the bull market that turned global credit markets into a homogeneous mass of expensive assets. They recommend taking a more defensive stance and positioning the gap between safer and riskier debt to widen.
Some Wall Street banks have begun reducing their exposure to debt from Apollo Global Management’s BrightSpeed, which has been sitting on their balance sheets since its acquisition two years ago.
Spirit Airlines is in talks with Frontier Group Holdings Inc. about filing for bankruptcy to facilitate an acquisition by a rival low-cost carrier.
Bankrupt hedge fund Wyeth Multi Strategy Advisors LLC and its largest creditor, Jefferies Financial Group, are in the midst of a possible settlement of lawsuits related to the bankruptcy of George Wyeth’s eponymous company. We are discussing a certain settlement.
On the move
Wells Fargo has hired Barclays veteran Peter Thomson as managing director of the syndication division of the bank’s leveraged finance business.
Barclays has announced the hiring of leveraged loan and high-yield bond syndicate banker Anastasia Chernetskaya from Deutsche Bank in London.
Insurer Pacific Life has hired Richard Talmadge as head of private asset-backed securities.
HSBC Holdings has hired Lawrence Hsu from Goldman Sachs Group as head of European financial credit trading.
Marathon Asset Management is preparing to package securities and issue collateralized loan securities that meet European regulatory requirements through a newly created investment advisory division called Bryant Park Funding CLO Management.
–With assistance from Neil Callanan and Dan Wilchins.
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