Goldman Contrarian Joins Chorus Warning on Bond-Market Liquidity

Wire: Bloomberg News (BN) Date: Nov 11 2015 8:35:30
Goldman Contrarian Joins Chorus Warning on Bond-Market Liquidity
By Cordell Eddings
(Bloomberg) — 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.

Easy Money

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.”

‘Buying Mood’

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.”

For Related News and Information:
Top Stories: TOP
Bond Liquidity Seen Worsening by BofA as Regulations Tighten (2)
JPMorgan Asks Who’ll Provide Market Liquidity as Rules Shift (1)
What Corporate Bond Problem? Liquidity Ample, N.Y. Fed Says (1)

To contact the reporter on this story:
Cordell Eddings in New York at +1-212-617-7344 or
<a href=”bbg://msg/ceddings@bloomberg.net”>ceddings@bloomberg.net</a>
To contact the editors responsible for this story:
Nabila Ahmed at +1-212-617-5534 or
<a href=”bbg://msg/nahmed54@bloomberg.net”>nahmed54@bloomberg.net</a>
Kenneth Pringle, Faris Khan