Yves here. This post illustrates how remarkably short investors’ memories are. Or they may be betting that if they have a big enough hissy fit when monetary authorities raise rates, as they did during the taper tantrum of 2013, that central banks will lose their nerve.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
Companies are selling bonds like madmen. This year through Tuesday, investment-grade and junk-rated companies have sold $438 billion in new bonds, up 14% from the prior record for this time of the year, set in 2013, according to Dealogic. This quarter is already in second place, nudging up against the all-time quarterly record of $455 billion of Q2 2014.
About $87 billion of these bonds funded takeovers, a record for this time of the year, the Wall Street Journal reported. The four biggest bond sales in that batch were for healthcare takeovers, including the Actavis deal whose $21 billion bond sale was the second largest in history, behind Verizon’s $49 billion bond sale in 2013.
Actavis had received orders for more than four times the bonds available, according to CFO Tessa Hilado. “You don’t really know what the demand is until people start placing their orders,” she said. “I would say we were pleasantly surprised.”
Brandon Swensen, co-head of U.S. fixed income at RBC Global Asset Management, couldn’t “see anything on the radar that’s going to slow things down materially,” he told the Wall Street Journal. His firm expects rates to “remain low.”
All of the investors chasing after these bonds expect rates to remain low. Or else they wouldn’t chase after these bonds. If rates rise, as the Fed is promising in its convoluted cacophonous manner, these bonds that asset managers are devouring at super-high prices and minuscule yields are going to be bad deals. And their bond funds are going to take a bath.
But companies are selling bonds as if there were no tomorrow. They’re thinking that rates will not remain low. They’re trying to get these things out the door cheaply while they still can. They’re on a feverish mission to take advantage of these ludicrously low rates while they’re still available. And they use this cheap money to buy each other and to repurchase their own shares to pump up share prices and max out executive compensation packages, rather than investing it in productive activities.
So is the Fed Giving Split Signals?
Corporate issuers interpret these signals to mean that this won’t last, that they need to sell as much cheap debt as possible before rates rise, perhaps sharply. But bond fund managers interpret these signals in their own way, lulling themselves into thinking that rates will stay low forever.
One side is misreading the Fed’s signals. Perhaps bond fund managers don’t care; all they have to do is be as good as the market. And when rates go up, the entire market takes a beating, and bond fund managers individually can hide behind that.
But what happens when investors in these bond funds figure out that their bond fund managers had taken the wrong side of the bet, that corporate issuers had known all along what bond buyers had closed their eyes to – rising rates falling bond prices – and now they’re trying to unload their bond funds?
When bond funds face these kinds of redemptions, they first plow through their cash, then they try to sell the more liquid bonds in their fund, such as Treasuries, and if that isn’t enough, the less liquid bonds.
But liquidity is a funny thing: it evaporates without notice, just when you need it the most.
Liquidity gives you the ability to sell something without having to slash the price. When no one wants to sell and when you don’t need liquidity, there’s plenty of it. But when you really need liquidity to sell something because you see something worrisome, then everybody else sees the same thing, and they too need to sell. Buyers, who also see the same thing, disappear. And liquidity just evaporates.
It doesn’t mean you can’t sell. It means you have to slash your price to sell. Everyone has to slash their prices in order to lure buyers out of hiding. And worse, as prices get slashed in a highly leveraged market, margin calls go out, hedge funds get nervous, and leverage begets forced selling. And prices drop further. But this leverage once provided liquidity, and now it doesn’t go anywhere else and doesn’t shift to other assets, but gets paid off. It too just evaporates.
That’s the Dynamic of Market Mayhem
After six years of global QE and interest rate repression, absurdly inflated valuations – from government bonds with negative yields to junk bonds with ultra-low yields – have become the norm. But liquidity has become, to use the Bank of England’s expression, “more fragile.”
Last week, the Bank for International Settlements rang the alarm bells on liquidity, fretting that bond markets have become vulnerable to these sorts of shocks. And yesterday, the Bank of England Financial Policy Committee released the statement of its March 24 meeting that was jam-packed with warnings about “market liquidity risks” – and potential “sharp adjustments in financial markets.”
It cited the Treasury flash crash last October as an example of when liquidity even in the supposedly most liquid of bond markets – US Treasuries – just evaporated. As it said, “sudden changes in market conditions can occur in response to modest news.”
And it frets: “investment allocations and pricing of some securities may presume that asset sales can be performed in an environment of continuous market liquidity, although liquidity in some markets may have become more fragile.”
Not that central-bank warnings have any impact on investors. They’re too busy chasing yield. And thus government bond yields continue to bounce along near zero, or below zero. High-grade corporate bond yields are so small they’re barely discernible. Junk-bond yields show that there are few risks out there, even for the riskiest companies in the riskiest sectors. It has taken central banks six years to blindfold investors to risk, and now investors have become addicted to these blindfolds and simply don’t want to take them off. But when they do, possibly all at the same time, they’ll find out that the liquidity they thought would be there for them has just evaporated.
In the American heartland, real businesses are already getting nervous. “We don’t see the economy being as strong as portrayed in the national media,” the Kansas City Fed quoted one of them. Read… You Should See the Reasons Cited for the Plunge of the Kansas City Fed Manufacturing Index
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This article is absolutely spot on.
I was managing serious money in the City of London as far back as the early seventies. So called liquidity can disappear in an instant and it certainly did in those days.
The torrent of B/S nowadays is like something I have never seen before. There is a whole generation out there which is totally unprepared for what might happen.
I have a question. Does the liquidity disappear or simply it is shown that it never existed? The question is serious.
Liquidity is nothing more than your ability to sell, or liquidate, your asset. If there are plenty of buyers in that market then it is said to be liquid but if everyone gets cold feet and ceases to buy, the liquid freezes. It’s really a psychological phenomenon based on how confident one is in the prevailing conditions.
More than just a psychological phenomenon, especially in places outside of America.
Most Americans can’t tell where Afghanistan is, or, at least, when Bush was running, back then, most people here didn’t know where it was.
In Greece, lack of liquidity is real, because people really don’t have money to buy anything, or many things.
Spot on! Right now liquidity is being used by the CB’s as an excuse for what they know will happen
when they quit goosing the markets way past where they should be.
Are you talking ‘Oil Shock’ bad, or ‘S&L Disaster ‘ bad, or worse?
Your citation of the “…whole generation out there which is totally unprepared for what might happen…” sounds like a “History might not repeat, but it does occasionally rhyme” kind of observation. Before, “we” made it through when the government was willing to do the hard work to help the entire country weather the storm. Now that the governments are focused on helping the ‘elites’ find safe harbor, and “I’m alright Jack” to the plebs, things are looking scary.
Problems with financial liquidity are bad enough. What happens when society runs into liquidity problems with food, energy, and water? There are almost no people left who experienced the Great Depression of the 1930s. Time for a repeat lesson?
Again: if the Global Overclass wanted to engineer conditions designed to kill off 6 or so billion people over the next hundred years and make it look like an accident, how might they do it? How might they set those conditions up? “Never let a good depression go to waste”?
And for those among our fellow plebs out here who can bear to think about this question . . . what can bunches of plebs do to resilientise themselves against possible “disappearance of liquidity” in end-user individual-purchase-for consumption markets in food, water, electricity, etc.? If any of us plebs out here have any ideas about that, should we perhaps offer them right here on Naked Capitalism if/when appropriate? While there is still a coherent internet to post and find such information on?
” absurdly inflated valuations – from government bonds with negative yields …” Wolf Richter
I disagree. What is logically, economically and morally absurd is for a monetarily sovereign government to pay ANY positive interest on its debt:
Logically: The monetary sovereign has no need to borrow at interest what it can create at will interest-free.
Economically: Risk-free money hoarding should not be rewarded since progress requires taking risks.
Morally: Welfare should be proportional to need, not proportional to the amount of cash one lends to the monetary sovereign.
Bingo!
The whole Treasury Bond charade was cooked up by the banks so that sovereigns couldn’t just issues newly printed fiat to pay their bills, when in fact there is nothing wrong with doing such issuance of fiat as long as it is inline with overall economic growth and balanced budgets.
In fact, it’s exactly where we are today anyway! Just look at all the whining and moaning about not being able to pay back the Treasury debt issued thus far. Assuming we can’t pay it back (and issuing new debt to redeem old is not paying it back), then the debt is in the state of perpetual default — which is exactly the same economic outcome as having issued newly printed fiat in the first place.
With one big difference ….
Newly printed fiat precludes the banksters from collecting spread, rehypothecation, unholy trading leverage and debt pyramiding.
So there’s that.
Thank you Hammer and Examiner. My faith is restored.
My feeling is the investors are right. Rising interest rates will dampen asset prices. We already have a problem with some metals that’s hard to paper over (literally) – if land and buildings start on a descent trajectory, the banks will very soon be exposed to loss.
That should quite enough to prevent interest rates rising imo.
Our debt-based system has had its day. We can continue to play around with horrible ways to keep it afloat but the manly thing (excuse me Yves) is to start over.
What is immoral is to commingle the properties of the government with those of the people.
Actually, I think, it’s illegal.
“When a lawsuit is filed with the People as the plaintiff, any monetary reward should go to the People…directly and immediately.”
We should be looking at fixing the way we recycle the global surpluses but we are not doing it.
The winners of the last 4 decades, the bankers, exporters and dictators would welcome the reinflation of the Global Minotaur. It looks to me like the US would have a penchant for that option which would mean another couple of decades of hegemony.
Our economic structures are not made to tolerate rates at the zero bound for long. The reason why it has been OK up to now is because there have been capital gains. Once those gains stop, the game is over.
And now that 99.9% of people think rates can never go back up…. hmmm.
By this logic the one thing rates can no longer do is go up.
@Ambrit
I am talking “Oil Shock” when the FT. Ordinary share index fell from around 520 if my memory serves me right to a low of 148 although it took more than two years to do it. Interest rates went to 15% plus.
On a dark night I sometimes if it might be much worse. Today’s computer power, speed and our interconnected world might be too much of a good thing if it started to become unglued.
Thanks, I’ll have to do some reading up on that. The super high interest rates do resonate. Then, “we” still had a significant ‘middle class.’ Now that that ‘middle class’ has all but disappeared, who will supply the groundwork for continuing any sort of “decent” society? I for one, grew up on the fringes of that “middle” class. I cannot imagine what will take the place of that template for socially positive personal development. A template for socially negative personal development will do? A society of sociopaths seems like a semantic oxymoron.
With that computing speed and power, that interconnectedness, we also have a superhighway to disasters.
Previously, because men were too proud to stop to ask for directions, they frequently got lost on the way to catastrophes.
Now, we don’t have that little inconvenience any more. Artificial intelligence will guide us.
Central Banks Warn: Investors May Get Crushed When They All Run for the Exits
Investors Warn: Central Banks May Get Crushed When They All Run for the Exits
We can narrow it down to one of these two things.
‘Course the purpose of ZIRP and QE was for central banks to provide enormous amounts of liquidity, and force “investment” into non-liquid assets.
As George Peppard used to like to say, “I love it when a plan comes together.”
Then yesterday Janet Yellen made the comment:
“cash in not a very convenient store of value,”
So I guess a stock, bond, and commodity market crash, simultaneously and worldwide, is the new definition of “convenience.”
Or we might be tempted to say that Fed policy is nothing more than unipolar bubble blowing with nothing but ineffectiveness “on the way up” and a very bad ending. Nah.
“cash in not a very convenient store of value,”
She is the chief economist, above all. It might be a secret message to other economists to liquidate their own assets before the cattle and chickens catch on. Some animals are more equal than others. They are the pigs.
I agree that cash is not as “convenient” as digital impulses recorded on chips and sticks and drives. But cash may be more “resilient” and “durable” than those digital impulses wherever recorded. If cash remains “mutually believed in” by people who have lost all their digital impulse money but did manage to hold back a few thousand dollars “worth” of coins and bills, then those “mutually believing mutual believers” will still be able to buy and sell material goods and services between eachother at a cash-equivalent of survival barter for themselves and eachother.
So perhaps some rolls of bills rolled up in little water/vapor proof containers and hidden under upside down flower pots and in retaining-wall weeper holes might be safer than digital “munny” in a bank. Especially if black widow spiders can be encouraged to nest and live under every flower pot and up inside of every weeper hole. And the owner of the money knows to wear spider-proof gloves when getting the money, but nobody elses knows about wearing the spider-proof gloves if THEY come to “take” the money.
And you know . . . value itself is a store of value. Anything and everything in any particular context is worth itself in that particular context.
What is several years worth of food stored in advance worth? What is the ability to harvest and store all your roofwater both rain and snow in multi-thousand-gallon storage tanks? What is having a waterless composting toilet inside your house require zero water to process pee and poo worth to you?
What is several years worth of nontoxic shower soap combined with a system to divert your nontoxic shower water to a water-garden outside your house worth to you? What is it worth it to you to buy these things and preparations for money now, while there is still money to buy stuff with and stuff to buy with money? Surely some of the readers here have just enough money to think about this a little bit.
Wolf Richter’s observations are sound, as far as they go. But he doesn’t touch on a fundamental underlying issue: bonds are still an over the counter market, without a central exchange.
What does this mean? Even in the most liquid bond market on the planet — U.S. Treasuries — you cannot hit an electronic offer and get an instant execution. From on online retail trading platform, you place your order based on an indicative quote, somebody calls a dealer behind the scenes, and 5 or 10 or 15 minutes later your fill shows up. At Chas. Schwab, you actually have to call the bond desk. Sometimes they can give you a fill on the phone; sometimes you have to wait for a few minutes.
Compare that to Treasury futures, where from any online platform, you can get a fill in milliseconds.
The U.S. bond market is stuck in horse-and-buggy days. It hasn’t changed since Jesse Livermore ruled the bucket shops. The Treasury offers a rather good online site (treasurydirect.gov) for purchasing original issue bonds. But they have done nothing to modernize the secondary market in Treasuries, which serve as the reference yields for other bonds. Does Jack Lew even do emails? Wake up, guys!
Obviously, when crunch time hits, the Masters of the Universe will stop answers each others phone calls, and everyone can watch the treasury futures markets to see the present value of their portfolios. ‘Tis only a problem if we must “mark to market” or meet 30:1 margin calls(the big guys) – or any margin call for the rest.
It would be really nice if you could hedge your collapsing corporate bond ETF by shorting T-note futures. Unfortunately, when Lehman collapsed, T-note futures went UP (safe haven buying) as corporates slid.
No corporate bond futures contract exists, since defining the ever-changing underlying basket would be too complicated. Hell, it’s complicated enough with Treasuries, where a ‘cheapest to deliver’ has to be selected from a half dozen or more issues within the eligible maturity range.
What’s a coupon clipper to do? *throws hands in the air in exasperation*
Seeing as how the Fed ended QE 4 times already, I choose to sit in “inconvenient” cash the whole time. I wasn’t brave enough to be 100% sure the Fed was just kidding about ever ending QE and finally raising interest rates.
BlackRock expands on the theme in a white paper:
BlackRock recommends ‘all to all’ trading venues (same as stocks); multiple e-trading platforms; and some standardization of corporate bonds (whose special features vary a lot more than common stocks).
BlackRock is the largest ETF issuer, so they care. Liquidity is in their customers’ interest too. What happens to illiquid bond ETFs is that they go to excessive premiums and discounts, owing to the inability of arbitrageurs to assemble creation units in illiquid markets.
Kyle Bass
http://www.zerohedge.com/news/2015-03-28/kyle-bass-warns-fed-backed-corner-equities-are-my-biggest-liquidity-worry
The bubble machine
http://www.zerohedge.com/news/2015-03-28/bubble-machine-complete-soaring-stocks-push-investors-bonds-whose-issuers-buy-more-s
Jack Lew did emails, then erased them all. At least all the personal emails.
Um, futures are not a security. They are a wager.
And tell me how great the Treasury market is. You couldn’t repo a Treasury during the worst of the crisis.
The reason an OTC market is OTC is due to its natural characteristics. Corporate bond issues are discrete. Each is unique, but they are fungible, since buyer buy bonds for their characteristics (yield, coupon, sinking fund, maturity, rating, whether the covenants are any good). That’s different than stocks, where a buyer of Google won’t see Apple as a potential substitute.
Bonds aren’t liquid because the market itself has lots of instrument, and many buyers are buy and hold, or buy and not trade unless they have a good reason to. You can’t make the logical buyers and sellers transact more just because you think it might be better.
Moreover, excessive secondary market activity is the reason finance is outsized and draining resources from the real economy. As a result, we should want financial markets to be less liquid. We need a transaction tax on the Treasury futures market, not a more liquid corporate bond market. Investors do not have a right to liquidity.
The plan was to maintain plenty of liquidity. So is the Fed now saying it cannot accomplish the goal it set out for itself? Well, we were “100% sure” we could keep the system flush, but when cash becomes an “inconvenient” way to store value, (I think this just means nobody yet knows how to account for all this frenzy) then we have to talk about other forms of “money” – something that can be accounted for, aka controlled. Does this mean the Fed knows a creative new way to do helicopter drops? I can think of a few that could work wonders. Maybe give everyone a huge credit balance at the Fed and let them draw whatever they need/want. Or simply punt and raise interest rates because old accounting protocols are completely lost… dear jesus.
Lots of interrelated individual financial issues in play here — smi;}e — but the Big Kahuna in the closet is “Friedman Monetarism is Dead !!” After all, what have we gotten with $4 Trillion in Fed QE?
Given the One Percent’s suppression of other than military/”security”/”privatization” fiscal spending, aka “Austerity”, lower energy prices will be the real driver out of this economic morass… if there is one.
Heh, que up Ronnie Milsap’s “Lost in the 50’s Tonight”: https://www.youtube.com/watch?v=MJ_bkuAZD8A
Enabling TBTFs’ speculation in derivatives and funding corporate stock repurchases at price peaks with QE-ZIRP money to maximize corporate executives’ stock option income is not my idea of “risk taking”, nor are these activities socially beneficial. Those who truly take entrepreneurial risk are not significantly influenced by whether real interest rates are negative.
And yeah, I suspect fear of the bodies piling up at the jammed exits from a very late party is at least partly behind the Fed’s failure to move already.
Given endless government market interventions, most bond traders & bond fund managers alive have never had to take a loss. Going to be fascinating to seem them scramble buy in an up-rate world. I suspect there will be government guarantees offered to bond funds that have cascasding losses & liquidations. The government has bought the pot in the mind of the fund management world.
Given endless government interventions, most bond fund managers/traders alive have never taken a loss. Going to be fascinating to see them scramble in an up-rate world, if the fed ever gets there. I suspect there will be government guarantees offered to the larger bond funds that face cascading losses & investor redemptions. The government will “buy the pot” is the bet the fund management world is making, just as the banks wagered in ’08. They knew if everyone was in it together, they would be bailed out.
They don’t bet.
They know.
The only uncertainly is whether they are chosen or not chosen to be on the ark when the flood comes to wash out the, um, mis-allocations.
You hire hackers (or former hackers) to be your cyber-security guards.
So, maybe we should listen to those Central Banks who built the entrances in the first place.
Unless, you are firmly in the comp of incompetence, in that age-old riddle, evil or just dumb.
Lots of interrelated individual financial issues in play here — smi;}e — but the Big Kahuna in the closet is “Friedman Monetarism is Dead !!” After all, what have we gotten with $4 Trillion in Fed QE?
Given the One Percent’s suppression of other than military/”security”/”privatization” fiscal spending, aka “Austerity”, lower energy prices will be the real driver… if there is one. (Que up Ronnie Milsap’s “Lost in the 50’s Tonight”.)
Enabling TBTFs’ speculation in derivatives and funding corporate stock repurchases at price peaks with QE-ZIRP money to maximize corporate executives’ stock option income is not my idea of “risk taking”, nor are these activities socially beneficial. Those who truly take entrepreneurial risk are not significantly influenced by whether real interest rates are negative.
And yeah, I suspect fear of bodies piling up at the exits from the all-night party is partly behind the Fed’s failure to move rates up already.
It is likely that I am mistaken, and would be happy to be shot down in flames if so, but wasn’t Friedman’s monetarism about a sort of mechanical steady increase in the money supply, something on the order of 2% per year to accommodate a growing population that was steadily increasing it’s productivity?
To my mind, that would actually be a sensible way to run things.
That sounds suspiciously like a modern day gold-standard since, iirc, the stock of gold increases (historically) about 2%/yr on average and would probably LIMIT real economic growth to about 2% a year since that is also, iirc, what the West averaged under the gold standard.
We need ethics wrt to money creation, not some stupid (literally) rule.
The only ethical money creation and injection into the system, to me, is one that is diffused and bottom-up, instead of top-down, ownership of said newly created money aside.
Has there been any analyses done on what might cause a crash if all the CBs never raise rates ever again in our lifetime?
The most likely scenario is that with bond yields at or below zero, equities are correspondingly bid up to an earnings yield approaching zero. Make up any index number you like — S&P 2800; Nasdaq 7000.
Then one mild autumn day, a monarch butterfly in Oaxaca flaps its wings, and equities fall 36% for no reason at all.
No one could possibly have foreseen it.
How much leverage is in the world now?
I’m looking for yield, and I find quite a few that pay WELL over 10%
http://finance.yahoo.com/q?s=MITT
“WMC uses leverage, comprised of borrowings under repurchase agreements, to accomplish higher returns.”
http://www.dividend.com/dividend-stocks/financial/diversified-investments/cys-cys-investments-inc/#profile
“The firm achieves its objective by investing on a leveraged basis in residential mortgage securities for which the principal and interest payments are guaranteed by different government organizations”
So the question I have is: how can companies that invest in bonds, finance, etc, call it what you will, in such a low rate environment, give such great returns? Other than leverage (great investing choices???) how can low interest rates yield so much money?
The “shadow banking system” seemed to take the authorities by surprise – I wonder if entities that do not call themselves shadow banks aren’t doing exactly the same thing.
Have we gotten ourselves in a situation that higher interest rates are just not possible?
Lehman – one company can cause the collapse of the world? Or can no company endure a decrease in any asset price?
The secret is ZIRP + leverage. Unleveraged, a bond fund can hold junky debt that yields 5%. Borrow at close to zero and double the assets, and near 10% returns are possible.
When Bill Gross left Pimco, he was most proud of some closed-end bond funds that delivered huge returns over the past 5 years. But in 2008, some of those same funds lost 75% of their value.
Those high yields come with a sting in the tail.
…the magi-matics of surreality…a world where prosperity is defined as ‘paper’ begetting ‘paper’ begetting ‘paper’… and any correlation to reality is merely incidental or coincidental until those vexatious inconveniences , aka limits, begin demanding attention and eventually overwhelm…
Courtesy of cefconnect (Closed End Funds connect), here’s a list of a couple of hundred leveraged funds with yields in the mid to high single digits.
http://www.cefconnect.com/Screener/FundScreener.aspx
No investment recommendation intended, I assure you!
Are the skills related to finding endless opportunities or deception(i.e., presenting the impossible as possible)? Inquiring minds want to know!
To me, in a forever-young-low-rates world, everyone will be in the stock market and profit from such bets, sorry, investments.
And there will be no one to serve drinks at billionaires’ dinner parties.
It’s due to that extremely disturbing prospect that we are certain rates will have to go up one day.
Stunning factoid from BlackRock:
Just to emphasize that the eye-popping 9,000 number is not a typo, the three top issuers and their number of bond issues outstanding are: (1) Citigroup, 1865; (2) JPMorgan, 1695; (3) Goldman Sachs, 1488.
Wouldn’t it be kick in the head, if these same TBTF authors of the 2008 crisis crashed the market again? You just know, left to the own skeevy devices, they will.
So, what do you think those companies are doing with all that borrowed money? Buying government bonds???
Stock buybacks?
CEO bonuses?
Investing in companies that will pay decent wages, provide secure jobs, and come with good benefits to Americans?
OUCH!!! I hurt myself laughing…
snakes eating their tails…
Actually, seriously, I think the question of what firms are doing with all that money is important. One hears all the time that American firms aren’t “investing.” And if we only have low, low, low interest rates, than we can have “investing”. So what ARE they doing with all that money???
But it seems to me there is a belief that borrowing and investing are synonymous – and maybe, just maybe, that is not the case.
Stock buybacks and stashing in overseas tax havens. And CEO and executive bonuses for jobs well-done.
I fool them once, joy on me.
I fool them twice, don’t stop me now.
Factoid alert.
Execution risk, which typically resides with the dealer in an OTC market, has effectively shifted to the investor, while the market structure has not changed to an agency model.
Look at what all that productivity has wrought. The fastest computers, the finest optical switches made on the finest machine tools in the world, for the purpose of trying to siphon money from a gushing pipe of debt.
When the shit hits the fan, the fan will stop because it was a brick instead.
Hopefully pitchfork manufacturers are seeing an uptick in demand.
Huh? No one in the 1980s or 1990s would ever have made that statement about the corporate bond market. Holding a security means you have liquidity risk unless you choose to hold super liquid securities.
Everyone understood that the dealer might not bid (your call would weirdly not be answered) or if you used one of the houses that as a point of differentiation always made a price (Salomon and Bear) you might not like the price.
“Lack of liquidity” actually generally means the seller does not like the current price, not that he can’t transact at all.
It seems to me we’ve dug ourselves in a hole that keeps getting deeper. As long as central banks can keep QE going — someone, maybe us after Europe’s is done — the day of reckoning can be put off and paper assets can continue to be shuffled back and forth, with middle-men continuing to skim their margins.
Sooner or later the free ride will end with the discovery that most liquid “assets” are merely phony paper, or real assets that have lost all their value. The future tweaking upward of interest rates seems to be an attempt to lessen the blow when the crash hits and give the big players time to get out and leave the people with the bags of worthless assets. Who knows, maybe this is already starting to happen.