The Inextricable Liquidity Link Between HY ETFs and The World At Large

MarketsMuse Editor Note: Our editorial team leader has spent more than 15 minutes across the capital markets throughout almost 30 years and in the course of hearing and reading about all of the most recent initiatives to electronify the corporate bond markets so as to ‘get in front’ of the next liquidity crisis, our inspiring commander pointed us to this extract from last night’s edition of  “Sight Beyond Sight”

Liquidity Satire

Following last week’s price action where the lack of liquidity was a dominant theme in the credit markets we were reminded of the June 17th edition of Sight Beyond Sight. 

At the time a Financial Times article stated that “Federal Reserve officials have discussed imposing exit fees on bond funds to avert a potential run by investors, underlining regulators’ concern about the vulnerability of the $10tn corporate bond market.”

We thought we would reprint a fictitious exchange between the CEO of a large bank historically known for taking risk and the CIO of the world’s largest asset manager here given what is unfolding in credit currently.

Please forgive our attempt at satire; we mean to inform, and hopefully amuse, not insult.

Rick at Blackrock:  Hi Lloyd. Our “Yellen Index” is flashing imminent Fed tightening. We can’t tell you the inputs but this is our internally used proprietary index and is made up of the economic statistics she most favors and right now it is saying the Fed should already be tightening.”

Lloyd at GS:  So what does that mean to me Rick? We are an M&A and asset management shop now.

Rick at Blackrock:  Whatever helps you sleep at night, Lloyd. I need a bid on a 16 billion corporate bond portfolio ASAP.

Lloyd at GS:  We are not in that business anymore due to new capital requirements, balance sheet constraints and regulation.

Rick at Blackrock:  Lloyd, we go back a long-time and we pay your firm nine figures per year. I need a bid now.

Lloyd at GS:  What do you think this is Rick? The 2004 interest cycle? Send over a list and we will work it on an agency basis.

Rick at Blackrock:  Screw you Lloyd. I am calling my friends at Bank of America.

One hour later and a repeat of the same call…

Rick at Blackrock:  Lloyd, take a working order and don’t bring me back partial fills. I need this to be done.

Lloyd at GS:  Ok. On one of these bonds we can fill you on a 5mm piece right away. You leave 95mm.

Rick at Blackrock:   5mm done, leave 95mm? Lloyd, I don’t leave 95mm. I leave 9.5 billion.

Lloyd at GS:   I know, Rick. I was trying to be sensitive to the fact that a bank is not a liquidity provider to facilitate your size during this cycle.

Rick at Blackrock:  What do you suggest we do?

Lloyd at GS:   We have to shift at least some of the risk to the little guy. Let’s talk to the FED.

Rick at Blackrock:  You want to “gate” retail?

Lloyd at GS:  Not to the same extent that Hedge Funds “gated” rich people in 2009, just something to make them think twice before selling.

Rick at Blackrock:   Great idea. I will remind my contacts that 1 trillion of our 4 trillion AUM is managed on behalf of the FED and these are tax payer dollars. So our interests are aligned.

Lloyd at GS:  We should probably call your West Coast competitor as well. I bet right now Bill already wished his total return fund was gated so he will be receptive.

Rick at Blackrock:  Let’s send a trial balloon out ASAP. Oh, by the way. I am very sorry I played the “we go back a long-time and pay your firm a lot of money” card. I realize that gating a mutual fund would never pass as that would require a rule change at the SEC. As you can see, our concerns here about liquidity are very high given the generational long in Credit. Can I take a fill on the 5mm odd lot to get started?

Lloyd at GS:  Yes, I already crossed the 5mm on the other side. A mutual fund in our asset management business bought it as there are still retail inflows into our credit funds if you can believe it. Don’t worry; we used an inter-dealer broker in between. Have to feed them too before liquidity gets shut off…

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