TABB Group Research Shows Growing Structural Imbalance Plaguing US Corporate Bond Market

False Narrative Suggests Dealers Less Committed to Corporate Bond Trading While Empirical Data Demonstrates Liquidity Improving; Both Misleading, Says New Report

NEW YORK & LONDON--()--In new research published today, TABB Group says there is a growing structural imbalance plaguing the corporate bond market, highlighting the inconsistencies in both the narrative reported by the media and the empirical data in an effort to understand the current corporate bond conundrum.

Fixed-income institutional investors are worried about the state of liquidity provision, specifically liquidity in the US corporate bond market, which has dissipated since the financial crisis and has yet to recover, says Anthony Perrotta, a TABB principal, director of fixed income research, who wrote “Corporate Bond Conundrum: A Riddle Wrapped in a Mystery Inside an Enigma.” It exposes the growing structural imbalance plaguing the corporate bond market, highlighting inconsistencies in the narrative and data, examining the corporate bond conundrum.

“The headline narrative from media leads us to believe responsibility lies with the dealer community, which has withdrawn balance sheet commitment and reduced inventories by more than 75%,” Perrotta says. The reality, he explains, is dealer balance sheets declined only 21% from pre-crisis highs, inventories declined between 30 and 40% and market growth has significantly outpaced dealer capacity for liquidity provision.

As institutional investors continue operating their businesses using traditional means, relying on the status quo market structure – a principal-based liquidity provision model utilizing a quote-driven protocol – danger lies ahead, because all is not as it appears, which is why TABB Group warns a structural imbalance is emerging in the credit markets.

According to Perrotta, the empirical data tells us liquidity is not a problem, but the data is misleading. A structural imperfection has developed, placing the market in a precarious position. The historical balance between those requiring liquidity and those providing it has deteriorated. “While the market rests blissfully with narrow bid/ask spreads and unabated new issues, the boogeyman hides in the closet. The threat of price dislocation and extreme volatility is never far away – and it’s not readily apparent that the problem can be fixed within the current market structure.”

“Everyone is looking for the moment when volatility and profitability return but the tragedy may be that we all get exactly what we want,” Perrotta concludes. “If liquidity capacity fails to grow in concert with the universe of AUM, increasingly in the hands of mutual fund managers, the day may come when the conundrum quickly turns into a crisis. Although the monster under the corporate bond bed may never rear his head, if it does, it’ll do more than just frighten us. And if another crisis arises or the Fed misses its marks retreating from quantitative easing, the exit from credit may be heart wrenching.”

The 21-page, 11-exhibit report is available now for download by TABB Group Research Alliance Fixed Income clients and qualified media. For the Executive Summary or to purchase the report, visit or write to info@tabbgroup.com.

About TABB Group

Based in New York and London, TABB Group is the research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb.

Contacts

martinrabkinink
Martin Rabkin, 914-420-5739
mrabkin@martinrabkinink.com

Release Summary

Growing Structural Imbalance Plaguing US Corporate Bond Market, Says New TABB Group Research

Contacts

martinrabkinink
Martin Rabkin, 914-420-5739
mrabkin@martinrabkinink.com