24 Mar WILL QUARTER END REBALANCING INCREASE VOLATILITY?
The end of the first quarter is quickly approaching. Many, myself included, have expressed concerns about potential quarter and month end rebalancing. Long dated US Treasuries are down about 14% for the year and over 23% from August. As noted several times the Treasury market has entered into its first bear market since 1980.
Will there be rotation from equities into Treasuries given the increase in yields as Bank America is now suggesting?
Many times, I have referenced high profile quantitative trading firms stating the possibility of the continuation of the massive rotation from growth to value via quarter end rebalancing.
Are these fears of rebalancing overblown? Has the majority of the rebalancing already occurred?
In eight days, we may know the answer to the above questions. I must write however, typically a feared event does not occur. It is the unexpected event that impacts markets.
Perhaps a deeper question is about market liquidity or the ability to sell a security in times of volatility. The SEC has validated what every fixed income desk already knows…liquidity is greatly lacking, the result of Dodd Frank which eviscerated money center fixed income trading desks. Money center bank bond inventories are down over 90% since 2008 even as the bond market has exploded in size.
It is widely documented in times of volatility algorithmic or technology-based trading firms close their markets. They disappear. Regulators and academics also believed ETFs will also provide the necessary liquidity. As also widely documented this is not occurring in times of crisis.
And then there are equities. Many bulge bracket and large quantitative firms have commented about the dearth of liquidity given that 90% of volume is the result of algorithmic or technology-based trading.
I ask is the current violent rotation from growth to value, large cap to small cap, US to international, the result of this lack of liquidity, amplified by a massive concentration of wealth into a handful of companies or sector?
It is often written the solutions to yesterday’s problems is the genesis of tomorrow’s crisis. Will this be the case today for as noted above Dodd Frank has destroyed market liquidity via its mandate that money center banks can not take risked based positions, something necessary in times of crisis.
Radically changing topics, the former CIO of Blackrock’s ESG investing, Tariq Fancy, commented to USA Today “ESG is largely just hype and little substance behind it.” Fancy further stated “In truth, sustainable investing boils down to little more than marketing hype, PR spin, and disingenuous promises from the investment community.”
As widely noted, BlackRock’s’ Chairman Larry Fink has withheld votes for companies that are not pursuing the ESG manta. I guess this is why Fancy is the former CIO of ESG investing for Blackrock.
Commenting on yesterday’s market activity, equities traded about 1% lower on renewed virus fears. Treasuries rallied on these fears as well as the FRB Chair’s comments again playing down inflationary risks.
Last night the foreign markets were down. London was down 0.10%, Paris down 0.09% and Frankfurt down 0.42%. China was down 1.41%, Japan down 2.04% and Hang Seng down 2.03%.
The Dow should open nominally higher on economic optimism. The 10-year is steady at a 1.63% yield ahead of two key Treasury auctions scheduled for today and tomorrow. Oil is up about 4% on a blockage in the Suez Canal.