It’s Not Trade War Or A Market Drop That Is Keeping Credit Investors Up At Night

Two weeks ago, Morgan Stanley issued a report looking at the size of moves across all asset classes in the environment of declining market liquidity, and found that “It’s not your imagination, large moves are becoming more common in the market”.

One week later, Goldman repeated Morgan Stanley’s warning almost verbatim, writing that “No – it’s not your imagination – earnings day moves are getting bigger”. Specifically, the bank found that the moves in stocks post their Q2 earnings reports experienced the greatest absolute amplitude on record, and more than 50% higher than the long-term average of 2.4% over the past 15yrs. 

What was the common link between these two observations? Simple: the vanishing liquidity in the market, which has resulted in increasingly greater bid/ask spreads, as well a sharp decline in market depth, that has collapsed to levels not seen since the February VIXplosion (something Goldman also touched upon in “Market Depth Has Collapsed“. 

Fast forward to today, when in the latest survey of European credit investors conducted by BofA’s Barnaby Martin, the strategist observes that concerns about the market’s ever-shrinking liquidity have become the primary source of worry for professional investors, and as Martin writes, “it’s not trade wars or an equity market correction that look to be keeping credit investors up at night.” Instead, it is the fear of a “pervasive rush for the exit at some point in the future.”

In other words, what is keeping bond traders up at night is the fear that when the selling begins, there will simply not be enough liquidity to absorb it all.

What is just as surprising, is that just last month the top investor concern was “Bubbles in Credit”, i.e. excess liquidity, which one month later has now morphed into “Liquidity Vanishing”, which according to Bank of America is the first time in 3 years that this has emerged as the chief concern.