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Special Report: Mile Wide, Inch Deep: Bond Market Liquidity Dries Up
This was a very interesting article. Personally, I think we would all be better off with the attitude that bonds were vehicles to be held to maturity rather than to be traded willy-nilly, and I admit that when I hear Wall Street babbling about 'liquidity' I almost always make the cynical translation to 'churning', meaning finding an excuse to pile up the trading costs (which for them is trading revenue). After all, trading existing bonds is necessarily less than a zero sum game.
It all makes RSIVX seem more desirable to me. Buying "money good" bonds, always being willing to hold them to maturity, staying small enough to ensure a liquid market if you do wish to sell, all sounds very prudent in light of this article.
Churning was never a big problem in bond markets because the spreads have always been high and margins low to make it punitive for trading. Bond markets are more like real estate market than equities. Most bond funds don't trade unless they have to based on inflows and outflows.
If you need liquidity for mutual funds, then you need a market for trading except for very short duration bonds. You also need it for price discovery, otherwise you would never be able to establish a daily NAV with mark to market. Unless you develop a healthy derivatives market.
Problem is the inefficiency of the bond market like the real estate market because individual bond issues all look different from each other.
Market makers disappearing is a good thing I think except for big whales like Pimco that need to trade large volumes creating buy and sell side imbalances. The recent mini crashes have shown that market makers can suddenly disappear at the very moment you need them bringing into doubt the reason for their existence. The regulations have cracked down on many of the questionable practices like naked shorting and front-running that kept market makers happy and fat.
Many of the large trades are going on in dark pools now.
Comments
It all makes RSIVX seem more desirable to me. Buying "money good" bonds, always being willing to hold them to maturity, staying small enough to ensure a liquid market if you do wish to sell, all sounds very prudent in light of this article.
If you need liquidity for mutual funds, then you need a market for trading except for very short duration bonds. You also need it for price discovery, otherwise you would never be able to establish a daily NAV with mark to market. Unless you develop a healthy derivatives market.
Problem is the inefficiency of the bond market like the real estate market because individual bond issues all look different from each other.
Market makers disappearing is a good thing I think except for big whales like Pimco that need to trade large volumes creating buy and sell side imbalances. The recent mini crashes have shown that market makers can suddenly disappear at the very moment you need them bringing into doubt the reason for their existence. The regulations have cracked down on many of the questionable practices like naked shorting and front-running that kept market makers happy and fat.
Many of the large trades are going on in dark pools now.