7 ms·

People Are Worried About Bond Market Liquidity

46 points by dsri 11y ago

lmm 11y ago
I've long thought there should be an efficient-markets solution to flash crashes. If the majority of sudden price drops are flash crashes and not fundamentals trading, then someone ought to be able to print money by simply resting a big bid 19% (or however low you can go without tripping the circuit breaker) below the current price, for everything, every day, and cashing in when the price crashes and rebounds. That would smooth out the crashes without any need for external intervention. So why is no-one doing this?
- ZenoArrow 11y ago
  "then someone ought to be able to print money" Putting aside whether that'd be a good idea or not, government money is generated via the bond market. All new money in the US is generated via the bond market. Therefore, you can't use printing money as a way to stabilise the market that generates it.
  - lmm 11y ago
    I didn't mean literally print money. I meant make a lot of profit. In any case I'm more thinking about equity markets - are there even flash crashes in treasuries yet?
    - whatok 11y ago
      Yes. http://www.bloomberg.com/news/articles/2015-03-30/bond-traders-fear-oct-15-style-volatility-could-repeat http://www.bloomberg.com/news/articles/2015-03-30/bond-trade...
    - bladecatcher 11y ago
      I won't say these are flash crashes, but it's very normal to see 6 or 7 sigma events in Treasuries. Such large deviations are very rarely seen in stocks
- fmstephe 11y ago
  I would expect it to be very hard to distinguish between a temporary crash and a long term price movement. Prices are moving all the time and often for good reason. This strategy would have bought up large amounts of Nokia stock shortly before they became an also-ran.
- jasode 11y ago
  >, and cashing in _when_ the price crashes and rebounds. [my emphasis on "when"] I think the "when" is a huge part of the puzzle. How can an algorithm know the difference between a flash crash that will get remedied within 24 hours vs a longer period of irrational pricing that takes months to sort out? For example, at the time of the famous LTCM downfall[1], it held several arbitrage positions that were eventually proven right... but they didn't have sufficient capital reserves to survive the short term irrational spreads (Russian default, flight to US Treasuries, etc). I'm not saying that LTCM didn't have many other flaws of risk analysis that would have also caused their downfall but in that one case, it was an illustration of "the markets can remain irrational longer than you can remain solvent." [1]http://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259 http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...
  - deleted 11y ago
    [deleted]
  - rlucas 11y ago
    GP is talking about a long-only flash-crash arb strategy -- so assuming you're not buying on margin you don't have the need to have capital reserves to "survive" until the recovery. Of course, especially these days in the markets, whatever can be leveraged, will be leveraged...
- whatok 11y ago
  A "flash crash" in equities is not the same as a "flash crash" in bonds.
- scott00 11y ago
  One problem with this strategy is that when things go crazy, traders with unsophisticated execution technology start to get terrible fills on their market orders; they complain to their brokers who complain to the exchange, who busts the trade. If you buy at the flash crash nadir, and sell halfway back to "normal" you're likely to have the buy cancelled, and be stuck with the sale.
- exelius 11y ago
  They are doing this, but with some hesitation. Many "flash crashes" are caused deliberately to do just this, and the risk/reward of trying to game them is not worth it. In many cases, exchanges will roll back or invalidate any orders placed within 5 minutes of the flash crash, so the potential reward is not guaranteed. Any large orders placed immediately after the crash would be looked upon suspiciously. Any company capable of exploiting a flash crash in the way you describe would need to be a timing arbitrage player -- and that's not a cheap business to be in. But exploiting short term dips in pricing is exactly what that type of HFT is designed for. It's incredibly profitable, but also zero-sum because there are only so many lucrative opportunities. So it's an arms race to have the fastest systems, the fastest connection to the exchanges so you can preempt orders, etc.
  - lmm 11y ago
    It's not really zero-sum in the sense that HFTs are usually criticized for; if it stabilizes the market for longer-term investors then that's a positive effect.
    - exelius 11y ago
      Market stabilization/liquidity is the effect that HFTs are supposed to have. If they didn't have a benefit they would have been banned long ago. And arbitrage is always zero-sum: when your purchase of an asset drives the price of that asset up, there is a finite maximum on the number of shares you can buy without driving the price up so high as to not be profitable. There is also a finite number of shares out for bid at any given time; if you buy all of them then there aren't any for anyone else to buy.
- mauricemir 11y ago
  Id be more worried by a real bond price crash when the bank rate returns to normal as that what a lot of pensions are invested in.
zhte415 11y ago
A crash in bond prices means an increase in yields. The article doesn't mention, and acknowledges this, whether treasuries or corporate bonds are worrying people. If the former it could be back to 'normal interest rates' (or at least ones that reflect and account for economic growth), if the latter then another recession, but I think this call is 3 years too early. The article talks about CDOs and CDSs - the book 'The Big Short' by Michael Lewis is a good read about CDOs and CDSs in the run-up to the 2007/2008 crash.
- whatok 11y ago
  Both treasury and corporate bond liquidity are worrisome. At least from the credit perspective, banks were previously able to step in when shit hit the fan and smooth out market volatility. Between prop desks being dismantled and increased capital charges, banks are simply no longer warehousing risk. There's been constant sell-side pieces and more recently a lot of regulatory or government cautions on the topic.
  - nissimk 11y ago
    If interest rates begin to rise, this can really be a serious problem. If people start liquidating their bond mutual funds and etf's and there is no liquidity in the underlying bonds, there will be a large dislocation. But isn't all this rhetoric and fear mongering just here to promote a continuation of the zero interest rate policy? Japan's been there for 20 years and we're only at year 8...we've got to maintain zirp forever now. The list of terrible things that will happen in a rising rates environment is quite long.
    - marko2525 11y ago
      Yeah but the difference is that (non-index) mutual funds can actively allocate to different bonds so they have some protection against that. ETFs and index funds are in big trouble. For them, it's the equivalent of having people buy and sell an index of classic cars. If there is a big sell-off then you can't really expect to get a great price on selling all these classic cars when they might normally be bought or sold a few times a month. Being a forced seller is never good....
acd 11y ago
The central banks are printing money like crazy driving down interest rates below the historical average of 5.5% interest rate. This jacks up stocks prices and pushes up a new tech bubble. Who knows where we will end up another pets.com maybe? http://en.wikipedia.org/wiki/Pets.com http://en.wikipedia.org/wiki/Pets.com
- brc 11y ago
  Sarbox rules have made it very difficult to list a company. No more pets.com because no more floats. When was the last time you heard about a small operation with little revenue, no profits and not much of a business model getting floated ? These days it just doesn't happen much. The floats are all giants like Facebook. Back in the late 90s these things were listing monthly.
PaulHoule 11y ago
That is the least of things to worry about. Talk to any face to face financial advisor and they will tell you to buy bonds not bond funds. (You never hear this in the financial press, funny...). The issue is that bond funds don't behave much at all like bonds do because they are always trading to keep the maturity distribution constant. This in turn throws off the logic behind the idea that at age X you should have Y percent of bonds and Z percent of stocks. If you are doing the "put $50 a week in your IRA" thing, you can't even buy bonds because the denominations are way too large period, but it is even worse if you want diversity. I'd love to see some kind of ETF with an expiration date that would behave like a bond, give diversity against default risk and be denominated to be a tool for the ordinary investor. Trouble is it is hard to get anybody excited about bonds today and if interest rates ever go up, bond funds will be a bloodbath -- PIMCO will lose more money for investors than anyone in history, not because they did anything wrong but just because that is how the cookie crumbles. With that backdrop it might be 25 years before people will buy a new debt product.
- whatok 11y ago
  I think a larger problem with bond and loan ETFs is equity-like liquidity for an underlyer that is inherently illiquid. A lot of these are unproven in times of market stress and bad things can happen very quickly with how the market is right now. Don't necessarily agree with your assessment on rates but yeah hard to get excited about bonds right now.
  - marko2525 11y ago
    This is totally true. The problem is that because bonds don't trade often, it's hard to make an index ETF based on them. You're basically asking something to be revalued multiple times a day when the holdings might get their price updated (via a trade) once a week or even once every month.
- scott00 11y ago
  > I'd love to see some kind of ETF with an expiration date that would behave like a bond, give diversity against default risk and be denominated to be a tool for the ordinary investor. They actually already exist: http://guggenheiminvestments.com/products/etf/bulletshares http://guggenheiminvestments.com/products/etf/bulletshares http://www.ishares.com/us/strategies/ibonds http://www.ishares.com/us/strategies/ibonds They're not super-liquid, but they exist.
fredfoobar42 11y ago
Isn't the whole point of bonds that they're _not_ highly liquid?
- jpmattia 11y ago
  It turns out: No. You're thinking about it from only one side of the table. For example: Gov'ts issue bonds on a regular basis to finance their debts. They depend on that market being there in order to continue normal operations. If liquidity evaporates, then many participants will not partake in the auctions, which is A Big Problem. Likely a central bank (a "lender of last resort") will step in for that case, but that only emphasizes that there are big market problems to the participants.
  - rrggrr 11y ago
    Opposite. Funds will flow to treasury auctions for two reasons. First, liquidity has to flow and will to the safest destiation; and second, account surplus countries (eg. China) have to recycle dollars to maintain their surplus and will have no options apart from treasuries.
jackgavigan 11y ago
I don't think there's a real problem here, except for forced sellers - I would pity an investor who is forced to liquidate a corporate bond portfolio because of a margin call. But liquidity risk (especially in the corporate bond market) isn't exactly news to anybody. Liquidity for US Treasuries may well be lower because the Fed's taken so many of them onto its balance sheet[1] but I don't think that a lack of liquidity is going to pose a real problem in that market. There's a difference between a market that's dislocated (by which I mean that the market price has deviated from the "real" value of the asset) due to a structural problem (like a lack of liquidity), and a market that has reached its peak (and/or is overvalued, and is undergoing a correction - which may be happening in Europe at the moment[2]). People get all excited about flash crashes and talk about billions of dollars being wiped off the value of whatever but it's complete horseshit. Just because a few trades happen at an unreasonable price because of a technical hiccup (or because of some strange, unforeseen interaction between different automated systems) doesn't mean that the underlying value of the asset in question has changed. If a share starts the day at $100, dips to $1 because of a flash crash, then recovers to $100, what has really changed? A few people may have made/lost money by being lucky/unlucky enough to have traded at an incorrect price (e.g. because a stop-loss got triggered or something) but other than the appearance of an icicle-shaped spike on a chart, it's just noise (and if you have a system which reacts to noise, then the problem lies with your system, not the market). Personally, I think the bond market has been propped up by "quantitative easing", which has, in turn, inflated the equity markets. At some point, that situation has to undergo a correction and that could well manifest itself as a crash if everyone dashes for the exit at the same time. But that's the nature of markets - they fluctuate, sometimes wildly. 1: https://research.stlouisfed.org/fred2/series/TREAST https://research.stlouisfed.org/fred2/series/TREAST 2: http://www.ft.com/cms/s/0/3722d4a0-0a63-11e5-82e4-00144feabdc0.html http://www.ft.com/cms/s/0/3722d4a0-0a63-11e5-82e4-00144feabd...
ISL 11y ago
Seems like the value investors might not be there to take the other side because they don't see value. If the price moves enough, they'll appear.
bcg1 11y ago
People should be worried about bond liquidity. In a normal interest rate environment, bonds are income producing instruments and if you don't need to sell and are ok with the interest rate, liquidity doesn't matter quite so much. However with near-zero rates for the last 5-6 years, bonds are only making money as long as there is actual deflation (which however increases default risk) or if yields keep dropping (which beyond zero becomes some weird sort of Einstein-Bose finance where people pay others for the privilege of lending them money). In this type of environment you can't just hold the bond to maturity and live off of the income... to cash out you must sell, so liquidity is critically important. The "flash crash" rhetoric in the article is a red herring. Much more troubling would be an actual fundamental shift in the market... the bonds markets are so huge that even small moves could prove to be seismic... I've always thought that preventing this was the true purpose of QE, and is the reason that the Fed quadrupled its balance sheet with little effect on the headline CPI or other mainstream measures of inflation... however it might not be a stretch to say that the hyperinflation that all the doomers were predicting is playing out in the bond markets. If that is the case, and the liquidity dries up because QE is over and everyone who was frontrunning the Fed decides to cash out... yikes
- lifeisstillgood 11y ago
  Could you explain the hyperinflation playing out in bond markets bit please?
  - bcg1 11y ago
    My use of the word "hyperinflation" was hyperbole referring to a commonly held view that unprecedented money printing by central banks could lead an inflationary nightmare, often asserted by doomer goldbugs. The polar opposite view seems to be the Keynesian theologians who believe that any level of money printing & gov spending are awesome++ and point to measures like the CPI that have not really moved even as the monetary base in the US has quadrupled since the financial crisis. What I meant with my comment is that perhaps the goldbugs were right about the problem but wrong about the effects and that the orthodoxy is wrong that everything is ok++ and there is nothing to worry about. Here's some dots to connect if you want to deduce my line of thought: https://research.stlouisfed.org/fred2/series/DGS30 https://research.stlouisfed.org/fred2/series/DGS30 (change the time period to 'Max') http://research.stlouisfed.org/fred2/series/WALCL http://research.stlouisfed.org/fred2/series/WALCL http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newssearch&cd=1&cad=rja&uact=8&ved=0CB0QqQIoADAA&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F9d794036-09cd-11e5-a6a8-00144feabdc0.html&ei=u5JwVafSE621sATrgoG4Dw&usg=AFQjCNHB6G-va1vyk3IT6R_55vMRd3brTQ&bvm=bv.94911696,d.cWc http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newsse...
fitzwatermellow 11y ago
Another Bloomberg report that sums up the fears spreading through the "bond market": Bond Rout Wipes Out 2015 Gains as Traders Stay Glued to Screens http://www.bloomberg.com/news/articles/2015-06-03/bond-rout-wipes-out-15-gains-as-traders-fret-even-leaving-desks http://www.bloomberg.com/news/articles/2015-06-03/bond-rout-... Bill Gross of Janus called German Bunds the "short of the century" and it looks as if US and JPY are equally vulnerable. $TLT down 15% since Jan and I believe it still has room to run on the downside. Now, interestingly, just this week Gross cited another "short of the century", calling for a top on Chinese Internet Stocks in the near term. But with another 25 IPOs coming down the pipeline this one will face a lot of headwinds. Man, I heart summer volatility... http://www.bloomberg.com/news/articles/2015-06-03/gross-s-next-short-is-china-s-stock-index-but-not-yet http://www.bloomberg.com/news/articles/2015-06-03/gross-s-ne...
fredkbloggs 11y ago
The people who worry about liquidity are always the people who bought on margin or otherwise used short-term debt to finance acquisition of long-term assets. If I were doing that, I'd be worried too, but it wouldn't matter whether the overpriced bubbly assets I bought were bonds, equities, artwork, or tulips.

46 points by dsri 11y ago

lmm 11y ago

I've long thought there should be an efficient-markets solution to flash crashes. If the majority of sudden price drops are flash crashes and not fundamentals trading, then someone ought to be able to print money by simply resting a big bid 19% (or however low you can go without tripping the circuit breaker) below the current price, for everything, every day, and cashing in when the price crashes and rebounds. That would smooth out the crashes without any need for external intervention. So why is no-one doing this?

ZenoArrow 11y ago
"then someone ought to be able to print money" Putting aside whether that'd be a good idea or not, government money is generated via the bond market. All new money in the US is generated via the bond market. Therefore, you can't use printing money as a way to stabilise the market that generates it.
- lmm 11y ago
  I didn't mean literally print money. I meant make a lot of profit. In any case I'm more thinking about equity markets - are there even flash crashes in treasuries yet?
  - whatok 11y ago
    Yes. http://www.bloomberg.com/news/articles/2015-03-30/bond-traders-fear-oct-15-style-volatility-could-repeat http://www.bloomberg.com/news/articles/2015-03-30/bond-trade...
  - bladecatcher 11y ago
    I won't say these are flash crashes, but it's very normal to see 6 or 7 sigma events in Treasuries. Such large deviations are very rarely seen in stocks
fmstephe 11y ago
I would expect it to be very hard to distinguish between a temporary crash and a long term price movement. Prices are moving all the time and often for good reason. This strategy would have bought up large amounts of Nokia stock shortly before they became an also-ran.
jasode 11y ago
>, and cashing in _when_ the price crashes and rebounds. [my emphasis on "when"] I think the "when" is a huge part of the puzzle. How can an algorithm know the difference between a flash crash that will get remedied within 24 hours vs a longer period of irrational pricing that takes months to sort out? For example, at the time of the famous LTCM downfall[1], it held several arbitrage positions that were eventually proven right... but they didn't have sufficient capital reserves to survive the short term irrational spreads (Russian default, flight to US Treasuries, etc). I'm not saying that LTCM didn't have many other flaws of risk analysis that would have also caused their downfall but in that one case, it was an illustration of "the markets can remain irrational longer than you can remain solvent." [1]http://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259 http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...
- deleted 11y ago
  [deleted]
- rlucas 11y ago
  GP is talking about a long-only flash-crash arb strategy -- so assuming you're not buying on margin you don't have the need to have capital reserves to "survive" until the recovery. Of course, especially these days in the markets, whatever can be leveraged, will be leveraged...
whatok 11y ago
A "flash crash" in equities is not the same as a "flash crash" in bonds.
scott00 11y ago
One problem with this strategy is that when things go crazy, traders with unsophisticated execution technology start to get terrible fills on their market orders; they complain to their brokers who complain to the exchange, who busts the trade. If you buy at the flash crash nadir, and sell halfway back to "normal" you're likely to have the buy cancelled, and be stuck with the sale.
exelius 11y ago
They are doing this, but with some hesitation. Many "flash crashes" are caused deliberately to do just this, and the risk/reward of trying to game them is not worth it. In many cases, exchanges will roll back or invalidate any orders placed within 5 minutes of the flash crash, so the potential reward is not guaranteed. Any large orders placed immediately after the crash would be looked upon suspiciously. Any company capable of exploiting a flash crash in the way you describe would need to be a timing arbitrage player -- and that's not a cheap business to be in. But exploiting short term dips in pricing is exactly what that type of HFT is designed for. It's incredibly profitable, but also zero-sum because there are only so many lucrative opportunities. So it's an arms race to have the fastest systems, the fastest connection to the exchanges so you can preempt orders, etc.
- lmm 11y ago
  It's not really zero-sum in the sense that HFTs are usually criticized for; if it stabilizes the market for longer-term investors then that's a positive effect.
  - exelius 11y ago
    Market stabilization/liquidity is the effect that HFTs are supposed to have. If they didn't have a benefit they would have been banned long ago. And arbitrage is always zero-sum: when your purchase of an asset drives the price of that asset up, there is a finite maximum on the number of shares you can buy without driving the price up so high as to not be profitable. There is also a finite number of shares out for bid at any given time; if you buy all of them then there aren't any for anyone else to buy.
mauricemir 11y ago
Id be more worried by a real bond price crash when the bank rate returns to normal as that what a lot of pensions are invested in.

zhte415 11y ago

A crash in bond prices means an increase in yields. The article doesn't mention, and acknowledges this, whether treasuries or corporate bonds are worrying people. If the former it could be back to 'normal interest rates' (or at least ones that reflect and account for economic growth), if the latter then another recession, but I think this call is 3 years too early. The article talks about CDOs and CDSs - the book 'The Big Short' by Michael Lewis is a good read about CDOs and CDSs in the run-up to the 2007/2008 crash.

whatok 11y ago
Both treasury and corporate bond liquidity are worrisome. At least from the credit perspective, banks were previously able to step in when shit hit the fan and smooth out market volatility. Between prop desks being dismantled and increased capital charges, banks are simply no longer warehousing risk. There's been constant sell-side pieces and more recently a lot of regulatory or government cautions on the topic.
- nissimk 11y ago
  If interest rates begin to rise, this can really be a serious problem. If people start liquidating their bond mutual funds and etf's and there is no liquidity in the underlying bonds, there will be a large dislocation. But isn't all this rhetoric and fear mongering just here to promote a continuation of the zero interest rate policy? Japan's been there for 20 years and we're only at year 8...we've got to maintain zirp forever now. The list of terrible things that will happen in a rising rates environment is quite long.
  - marko2525 11y ago
    Yeah but the difference is that (non-index) mutual funds can actively allocate to different bonds so they have some protection against that. ETFs and index funds are in big trouble. For them, it's the equivalent of having people buy and sell an index of classic cars. If there is a big sell-off then you can't really expect to get a great price on selling all these classic cars when they might normally be bought or sold a few times a month. Being a forced seller is never good....

acd 11y ago

The central banks are printing money like crazy driving down interest rates below the historical average of 5.5% interest rate. This jacks up stocks prices and pushes up a new tech bubble. Who knows where we will end up another pets.com maybe? http://en.wikipedia.org/wiki/Pets.com http://en.wikipedia.org/wiki/Pets.com

brc 11y ago
Sarbox rules have made it very difficult to list a company. No more pets.com because no more floats. When was the last time you heard about a small operation with little revenue, no profits and not much of a business model getting floated ? These days it just doesn't happen much. The floats are all giants like Facebook. Back in the late 90s these things were listing monthly.

PaulHoule 11y ago

That is the least of things to worry about. Talk to any face to face financial advisor and they will tell you to buy bonds not bond funds. (You never hear this in the financial press, funny...). The issue is that bond funds don't behave much at all like bonds do because they are always trading to keep the maturity distribution constant. This in turn throws off the logic behind the idea that at age X you should have Y percent of bonds and Z percent of stocks. If you are doing the "put $50 a week in your IRA" thing, you can't even buy bonds because the denominations are way too large period, but it is even worse if you want diversity. I'd love to see some kind of ETF with an expiration date that would behave like a bond, give diversity against default risk and be denominated to be a tool for the ordinary investor. Trouble is it is hard to get anybody excited about bonds today and if interest rates ever go up, bond funds will be a bloodbath -- PIMCO will lose more money for investors than anyone in history, not because they did anything wrong but just because that is how the cookie crumbles. With that backdrop it might be 25 years before people will buy a new debt product.

whatok 11y ago
I think a larger problem with bond and loan ETFs is equity-like liquidity for an underlyer that is inherently illiquid. A lot of these are unproven in times of market stress and bad things can happen very quickly with how the market is right now. Don't necessarily agree with your assessment on rates but yeah hard to get excited about bonds right now.
- marko2525 11y ago
  This is totally true. The problem is that because bonds don't trade often, it's hard to make an index ETF based on them. You're basically asking something to be revalued multiple times a day when the holdings might get their price updated (via a trade) once a week or even once every month.
scott00 11y ago
> I'd love to see some kind of ETF with an expiration date that would behave like a bond, give diversity against default risk and be denominated to be a tool for the ordinary investor. They actually already exist: http://guggenheiminvestments.com/products/etf/bulletshares http://guggenheiminvestments.com/products/etf/bulletshares http://www.ishares.com/us/strategies/ibonds http://www.ishares.com/us/strategies/ibonds They're not super-liquid, but they exist.

fredfoobar42 11y ago

Isn't the whole point of bonds that they're _not_ highly liquid?

jpmattia 11y ago
It turns out: No. You're thinking about it from only one side of the table. For example: Gov'ts issue bonds on a regular basis to finance their debts. They depend on that market being there in order to continue normal operations. If liquidity evaporates, then many participants will not partake in the auctions, which is A Big Problem. Likely a central bank (a "lender of last resort") will step in for that case, but that only emphasizes that there are big market problems to the participants.
- rrggrr 11y ago
  Opposite. Funds will flow to treasury auctions for two reasons. First, liquidity has to flow and will to the safest destiation; and second, account surplus countries (eg. China) have to recycle dollars to maintain their surplus and will have no options apart from treasuries.

jackgavigan 11y ago

I don't think there's a real problem here, except for forced sellers - I would pity an investor who is forced to liquidate a corporate bond portfolio because of a margin call. But liquidity risk (especially in the corporate bond market) isn't exactly news to anybody. Liquidity for US Treasuries may well be lower because the Fed's taken so many of them onto its balance sheet[1] but I don't think that a lack of liquidity is going to pose a real problem in that market. There's a difference between a market that's dislocated (by which I mean that the market price has deviated from the "real" value of the asset) due to a structural problem (like a lack of liquidity), and a market that has reached its peak (and/or is overvalued, and is undergoing a correction - which may be happening in Europe at the moment[2]). People get all excited about flash crashes and talk about billions of dollars being wiped off the value of whatever but it's complete horseshit. Just because a few trades happen at an unreasonable price because of a technical hiccup (or because of some strange, unforeseen interaction between different automated systems) doesn't mean that the underlying value of the asset in question has changed. If a share starts the day at $100, dips to $1 because of a flash crash, then recovers to $100, what has really changed? A few people may have made/lost money by being lucky/unlucky enough to have traded at an incorrect price (e.g. because a stop-loss got triggered or something) but other than the appearance of an icicle-shaped spike on a chart, it's just noise (and if you have a system which reacts to noise, then the problem lies with your system, not the market). Personally, I think the bond market has been propped up by "quantitative easing", which has, in turn, inflated the equity markets. At some point, that situation has to undergo a correction and that could well manifest itself as a crash if everyone dashes for the exit at the same time. But that's the nature of markets - they fluctuate, sometimes wildly. 1: https://research.stlouisfed.org/fred2/series/TREAST https://research.stlouisfed.org/fred2/series/TREAST 2: http://www.ft.com/cms/s/0/3722d4a0-0a63-11e5-82e4-00144feabdc0.html http://www.ft.com/cms/s/0/3722d4a0-0a63-11e5-82e4-00144feabd...

ISL 11y ago

Seems like the value investors might not be there to take the other side because they don't see value. If the price moves enough, they'll appear.

bcg1 11y ago

People should be worried about bond liquidity. In a normal interest rate environment, bonds are income producing instruments and if you don't need to sell and are ok with the interest rate, liquidity doesn't matter quite so much. However with near-zero rates for the last 5-6 years, bonds are only making money as long as there is actual deflation (which however increases default risk) or if yields keep dropping (which beyond zero becomes some weird sort of Einstein-Bose finance where people pay others for the privilege of lending them money). In this type of environment you can't just hold the bond to maturity and live off of the income... to cash out you must sell, so liquidity is critically important. The "flash crash" rhetoric in the article is a red herring. Much more troubling would be an actual fundamental shift in the market... the bonds markets are so huge that even small moves could prove to be seismic... I've always thought that preventing this was the true purpose of QE, and is the reason that the Fed quadrupled its balance sheet with little effect on the headline CPI or other mainstream measures of inflation... however it might not be a stretch to say that the hyperinflation that all the doomers were predicting is playing out in the bond markets. If that is the case, and the liquidity dries up because QE is over and everyone who was frontrunning the Fed decides to cash out... yikes

lifeisstillgood 11y ago
Could you explain the hyperinflation playing out in bond markets bit please?
- bcg1 11y ago
  My use of the word "hyperinflation" was hyperbole referring to a commonly held view that unprecedented money printing by central banks could lead an inflationary nightmare, often asserted by doomer goldbugs. The polar opposite view seems to be the Keynesian theologians who believe that any level of money printing & gov spending are awesome++ and point to measures like the CPI that have not really moved even as the monetary base in the US has quadrupled since the financial crisis. What I meant with my comment is that perhaps the goldbugs were right about the problem but wrong about the effects and that the orthodoxy is wrong that everything is ok++ and there is nothing to worry about. Here's some dots to connect if you want to deduce my line of thought: https://research.stlouisfed.org/fred2/series/DGS30 https://research.stlouisfed.org/fred2/series/DGS30 (change the time period to 'Max') http://research.stlouisfed.org/fred2/series/WALCL http://research.stlouisfed.org/fred2/series/WALCL http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newssearch&cd=1&cad=rja&uact=8&ved=0CB0QqQIoADAA&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F9d794036-09cd-11e5-a6a8-00144feabdc0.html&ei=u5JwVafSE621sATrgoG4Dw&usg=AFQjCNHB6G-va1vyk3IT6R_55vMRd3brTQ&bvm=bv.94911696,d.cWc http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newsse...

fitzwatermellow 11y ago

Another Bloomberg report that sums up the fears spreading through the "bond market": Bond Rout Wipes Out 2015 Gains as Traders Stay Glued to Screens http://www.bloomberg.com/news/articles/2015-06-03/bond-rout-wipes-out-15-gains-as-traders-fret-even-leaving-desks http://www.bloomberg.com/news/articles/2015-06-03/bond-rout-... Bill Gross of Janus called German Bunds the "short of the century" and it looks as if US and JPY are equally vulnerable. $TLT down 15% since Jan and I believe it still has room to run on the downside. Now, interestingly, just this week Gross cited another "short of the century", calling for a top on Chinese Internet Stocks in the near term. But with another 25 IPOs coming down the pipeline this one will face a lot of headwinds. Man, I heart summer volatility... http://www.bloomberg.com/news/articles/2015-06-03/gross-s-next-short-is-china-s-stock-index-but-not-yet http://www.bloomberg.com/news/articles/2015-06-03/gross-s-ne...

fredkbloggs 11y ago

The people who worry about liquidity are always the people who bought on margin or otherwise used short-term debt to finance acquisition of long-term assets. If I were doing that, I'd be worried too, but it wouldn't matter whether the overpriced bubbly assets I bought were bonds, equities, artwork, or tulips.