An attempt to lead with a Bitcoin headline in a topic that has almost nothing to do with Bitcoin. Clearly they have figured out that Bitcoin mentions and controversy are the only visit generators for their dying publication.
Bitcoin buzz shakes US bond market
By Tom Stabile
The buzz over Bitcoin is partly about its gall: an odd bunch of plotters aiming to build a vast community willing to trade in a digital currency free of central bank meddling. (Never mind that the favoured way to gauge its value is in good old Fed-tainted US greenbacks).
Folly or not, the new currency is an experiment in sowing trust across a yawning financial space without a supreme authority at its hub. The leap of faith is simply that, when needed, there will be another Bitcoinista on the flip side of an exchange.
Another testing site for this idea, incidentally, is the US corporate bond market.
That is where we see the “oligarchs of the money management business circling the wagons”, one speaker at a Money Management Institute conference in New York said last month. The biggest players are bothered enough about bond market liquidity to have set up their own trading posts – muddling an already messy experience.
The problem is that the US corporate bond market has turned somewhat top heavy.
At the start of 2007, the value of outstanding corporate debt in the US was $5.5tn, according to data from the Securities Industry and Financial Markets Association. By the end of 2012, that tab rose to $9.1tn.
At the same time, the inventory of US corporate bonds at primary dealers, as measured by Sifma, the Federal Reserve Bank of New York and Bloomberg, has shrunk. It went from its 2007 peak of about $230bn to $52bn by 2012.
These shifts came independently, says Bob Smith, chief investment officer at Sage Advisory Services, a Texas-based money manager, who spoke at the MMI meeting and a Securities and Exchange Commission symposium last month.
One reason outstanding debt is up is that corporate issuers have been active. After sliding to $707bn in 2008, new corporate bond issues peaked at nearly $1.4tn last year. Demand by investors for income-ginning securities and historically low interest rates both probably factor in this surge.
Meanwhile, inventories may be fading because the business of dealing bonds is less profitable to big companies, Mr Smith says. Regulatory changes now require greater capital reserves and liquidity for trading activities and inventory stocks.
While there are many venues to trade corporate bonds, it is a “crazy quilt” of unlinked electronic bidding systems and smaller dealers, he says. What may no longer exist are enough heavyweights with spare appetite to buy risk from many sellers.
“We have a market that has [grown by half] in size, while Wall Street’s capacity is one-tenth of what it was,” Mr Smith says. “If the dealer community isn’t going to provide the same sort of inventory cushion as in the past, what does that do to our risk transfer mechanisms?”
It may stir up less angst at large firms, some of which are carving out their own liquidity pools. Goldman Sachs, Morgan Stanley, UBS, Citigroup, BlackRock and others have created new breeds of online trading platforms, auction-orientated networks, or client-only bond trading “clubs”, he says.
That huddling of big traders “kind of works and kind of doesn’t”, Mr Smith says. It is still possible – though harder – for a firm such as Sage, which runs almost $11bn, to use its trading skills to find good deals in a normal market. The problem comes when markets churn faster and “everybody who has piled into the canoe wants out at all costs. Who is going to take your risk?”
A much cleaner fix, he says, would be a national exchange, “a mall effect” with an “anchor in the centre and lots of kiosks around it”. Others say the answer lies in more nimble, functional and co-ordinated electronic trading platforms.
Mr Smith says he does not sense panic. Today’s markets could still handle a normal wave of sell-offs. Over the longer term, however, an imbalance of fading inventories and growing debt volume can become toxic.
The powers that be – and the regulators too – ought to pull together soon, before the market splinters into a cluttered rabble of Bitbonds.
