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The Changing Bond Landscape

A recent Bloomberg feature traces how bond markets have changed since their glorydays in in the 1980s. Money managers have increasingly replaced traditional dealers, shifting the balance of power and making trading more difficult.

Traders used to be able to move $40 million of Treasuries in one move. Now, orders must be spread out in batches over longer periods of time. Whereas liquidity can often leave banks and dealers with little room to benefit from trading, the current situation also has proven tough on earnings. Deutsche Bank, Morgan Stanley, Credit Suisse, and RBS have all reduced their fixed-income desks over the past couple of years.

The question becomes: what are the implications for the health of the financial system? Liquidity normally is a signal of strength – yet, in this case, perhaps the illiquid landscape is merely a sign of a more evenly distributed financial system.


  1. Does this mean that last banks are approaching trading with costs and risks in mind? Not too long ago there was very little recognition of the capital tied up in a large trading operation, and of the capital that ought prudently be set aside to cover trading losses. This assumes I’m reading the story correctly, as I’m not sure what they mean by “money managers” as opposed to “dealers.”

    The other element is that during the financial crisis numbers of money market mutual funds (MMMFs) “broke the buck” as they had money in short-term CDs from firms that were involved in the financial panic and so could be sold only at a large discount. At 3% interest, a $1 million CD normally earns .03/360 x 1000000 = $83.33 per day. A short-term “discount” bond doesn’t issue an interest payment, instead it’s sold at less than face value, that is, you may pay 30 x $83.33 = $2,500 less than face value for a 30-day bond that is worth $1.0 million at maturity [$997,500]. The price then rises $83.33 each day. But out of fears of another Lehman, enough players in the market became worried that they might not get anything at maturity, and when money flowed out of MMMFs, managers couldn’t sell assets. The Fed stepped in to lend “as much as needed” to keep interbank markets from shutting down (which among other things would have rendered credit cards unusable).

    So my guess is that the balances of such funds are now far lower, and with it the demand for trades — though that may not be the source of this reduced trading. Someone, look at the Federal Reserve Board for numbers!!

  2. moorem15 moorem15

    From the article, I saw that some blame Dodd-Frank regulations for the shift in the bond market. Have the Dodd-Frank regulations decentralized the market to some extent, or do the regulations place amount and time restrictions on currency movements?

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