The problem with bond market power November 9, 2013 at 2:06 pm
Peter Lee in Euromoney points out that while dealers’ bond inventory has been going down, the big funds have got bigger.
Liquidity is drying up across the bond markets. Regulations designed to curtail banks’ leverage have had the unintended consequence of also sharply reducing their ability and willingness to make markets in corporate and even government debt.
Felix Salmon picks up the story and reposts this chart from Citi as evidence:
As the title hints, what is at stake here is the declining ability of the markets to absorb risk. Twenty years ago, dealers would make ‘risk’ prices for big blocks, committing their balance sheets to take on customer blocks in exchange for a return. That’s rare now, and become rarer. Dealer inventory has declined too as it becomes more costly in capital to hold. The net result is not just a market with wider spreads and less certainty of execution; it is also one that is becoming more and more vulnerable to even mild selling from the two buy-side leviathans, Pimco and Blackrock. It is no one’s interest that these firms are now so big that they cannot change their positions meaningfully without causing market disruption.