03 Apr A SCATHING FIXED INCOME REPORT FROM UBS…IS THIS A CASE OF IT IS NOT WHAT YOU SAY BUT RATHER WHY YOU SAY IT?
UBS wrote a scathing report about the lack of liquidity in the bond market. The firm used words such as “dysfunctional,” “dizzying” and “apocalyptic” to describe the current environment and potential outcome.
UBS stated the rapidly rising illiquidity is “exacerbating every selloff and rally, moves which are symptoms of a herd mentality.” The primary concern is when the credit cycle turns the “potential meltdown could be on the scale topped only be the financial crisis or Depression.”
The blame for this potential meltdown is a liquidity squeeze…the shifting institutional landscape because of regulations and the inability of money center banks to take risk base positions. The vast majority of trades must now match a buyer with a seller before executing the trade. Generally speaking, the buyer cannot be a bank (note: the largest brokerage firms are now owned by or are banks, a result of the 2008 financial crisis)
UBS further stated the massive proliferation of ETFs has exacerbated the situation with many harboring a false sense of security, complacency and liquidity.
Personally I experienced the above when the energy sector melted down in 2014-15. This was the same period as to when Bill Gross left PIMCO and several of his funds were liquidated and Dodd Frank was fully implemented. Bids and liquidity were virtually nonexistent.
UBS ended on an optimistic note stating that current market mechanics are being studied and hopefully modified before the credit cycle turns.
Earnings season is quickly approaching and many money center banks from JP Morgan to Citicorp to UBS has warned that fixed income revenues are down anywhere from 20% to 35%, the second consecutive quarter of such a massive drop.
Can I remotely suggest that UBS penned this report under the simple guise “it is not what you say but rather why you say it?” Fixed income trading is historically a major profit center.
Commenting about yesterday’s market activity, markets were relatively quiet ahead of the upcoming employment report and earnings season.
Last night the foreign markets were up. London was up 0.07%, Paris up 0.62% and Frankfurt up 1.29%. China was up 1.24%, Japan up 0.97% and Hang Sang up 1.22%.
The Dow should open moderately higher on generally upbeat global economic data and renewed hopes for a trade deal. The 10-year is off 11/32 to yield 2.52%.