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Thursday, February 2nd, 2012
drying up

As I wrote at a time when the fixed income markets were essentially frozen, liquidity “has a nasty habit of disappearing overnight.”  Even when the stuff isn’t hitting the fan, the willingness of dealers to hold inventory has an impact on the ease with which large trades can be made.

The chart shows the changes in the dollar value of positions at primary dealers.  The more volatile line week to week is that for mortgages, and some of the squiggles are noteworthy considering what was going on with the mortgage market throughout this period.

The more interesting line is that for corporates.  You can see a pronounced decline from late 2007 onward.  Less and less capital is being committed to that area as firms are paring and rejiggering their balance sheets.

I went searching for this data series after composing the inaugural edition of The Prudent Fiduciary Digest, since it contained items about changes in market structure and a link to an article in which the bond market was called “dysfunctional” and significant concerns were given about the lack of liquidity.

Investors have piled into corporates; are they ready for the ride that they’ll get if the cash flows start going the other way and the middlemen aren’t what they used to be?  (Chart:  Bloomberg terminal.)