Briefings
Week InReview: March 1, 2019
- By: admin
- On: 03/01/2019 10:23:52
- In: 2019 Briefings
People are worried about bond market liquidity
The standard story of bond market liquidity is:
— Matt Levine's Money Stuff
The standard story of bond market liquidity is:
- Big banks used to trade bonds by buying a large slug of bonds from a customer and holding on to them for as long as it took to find another buyer, smoothing out the market but also taking a lot of price risk for themselves.
- Since the financial crisis, new regulations (higher capital requirements, rules against proprietary trading, etc.) have made it more difficult for banks to trade bonds on their own books as dealers.
- Instead, banks have just matched up buyers and sellers without intermediating risk themselves, which is less convenient for the buyers and sellers. Also if anything goes wrong, the banks will not be there to take on their historic dealer role of smoothing out price moves, and there could be an ugly crash.
- People who do not want there to be an ugly crash tend to think this is bad.
- Other people think it is fine, though: If bond prices go down and someone has to lose some money, much better for it to be long-term fundamental bond investors with stable funding than for it to be banks. Banks are systemically risky, as we know, because losses at banks caused a massive systemic crisis in 2008.
— Matt Levine's Money Stuff
Read entire Week InReview: March 1, 2019