| Bond market liquidity, especially on the bid side, is still present, but shows signs of tightening. To our hypotheses last week (market makers short, low interest rates assured, the ECB collateral scheme and lower CDS spreads) can be added the fact that credit funds have been rebalancing their portfolios, and consequently buying more corporate bonds. The phenomenon is likely to be short-lived. Nevertheless, the demand amongst our clients for corporate bonds remains solid, quite independently of the practices of market-makers and credit funds. |
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| Another shift in market making dynamics has been drawn to our attention. Although screen prices imply a surfeit of market makers, and thus provide the sense of deep liquidity, these data are often illusory. The number of true market makers is down to somewhere between 5 and 10, with the others appearing to provide prices, but unwilling, or unable to trade. This would appear to support our theory of banks’ hoarding, or being unwilling to risk, capital in anticipation of further write-downs. |
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| For many years we have opined that countries spending beyond their means must pass through a period of belt-tightening to return to balanced economies, and sustainable growth. |