Bond Market Liquidity, Regulation, and The Public Interest August 3 - - PowerPoint PPT Presentation

Bond Market Liquidity, Regulation, and The Public Interest

August 3rd Teleconference Americans for Financial Reform Marcus Stanley, Policy Director marcus@ourfinancialsecurity.org

• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

25 Year Average -- 1.25%

Net Non-Financial Corporate Bond Issuance As Percent of GDP

Bond Issuance Looks Healthy….

Americans for Financial Reform

US Corporate BBB Option Adjusted Spread

Bond Spreads Look Healthy…

Treasury Rates Lowest In History, On Very High Issuance

5 Year Treasury Constant Maturity Rate

So What’s The Problem?

• Internal market ‘plumbing’ in some markets
• Some markets show declines in average trade size –

more trades to move the same dollar volume.

• No decline in overall secondary market trading – but

some decline in the ratio of trades to outstanding.

– But why should we expect trading volumes to grow with

• utstanding securities?
• Decline in balance sheet capacity for bank dealers.
• Several anomalous trading days in bond markets.

Questions

• Transactional liquidity: Do internal market issues

interfere with the flow of credit to the real economy – so far they have not seemed to.

• Systemic liquidity: effects during market stress?

– Could a lack of ‘shock absorption’ capacity lead to more rapid price declines during a sell-off? – Anomalous trading days -- are these blips driven by electronic trading? How worried should we be given that they did not have a systemic impact?

• What are the implications for regulation?

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Bank And Dealer Non-Government Bond Inventories

Includes non-GSE MBS, CDOs, Corporate Bonds, Foreign Bonds. Millions of $ Private depository institutions Total Including Broker Dealers Total As Percent of Assets (Right Axis)

Americans for Financial Reform 7/2015

Regulation: Allow a Return to the ‘Good Old Days’?

Regulation: Or Address Emerging Risks?

• Predatory electronic trading.
• Liquidity management and stress testing by

asset managers and funds.

• These are on the regulatory agenda, but we

have yet to see results.