While Wall Street
frets over the ability of bond markets to absorb an approaching
interest rate rise, the U.S. Federal Reserve has a message for the
industry: deal with it.
The
financial industry worries that when the Fed's tightening plans take
hold, a sell-off in the massive U.S. bond market could ensue, and be
exacerbated by a lack of bank buyers willing to jump in.
Banks, including primary dealers who act as market makers for U.S. Treasuries, have slashed bond inventories in the past few years in response to tougher capital requirements, reducing a liquidity buffer for the fixed income market.
Private and public comments by Fed officials show that they do not share Wall Street's degree of concern about liquidity, and do not believe that capital rules are solely to blame for the bond market’s growing tendency to seize up.
Effectively, regulators are telling the industry it is the responsibility of banks, funds and other market players to protect themselves.
"It's hard to find any financial market player who doesn't talk about being concerned about potential liquidity issues," Eric Rosengren, president of the Boston Fed, which oversees many of the country's largest asset managers, told Reuters.
"So it would surprise me if I found that people were using a particular model and didn't use any intuition about what goes into those models, and what might happen if everybody blindly uses those models."
At last week's congressional hearings, Fed Chair Janet Yellen resisted pressure by Republicans to acknowledge that new capital rules were destabilizing markets.
The Fed's assertive stance is setting the stage for more volatile fixed income markets and where liquidity droughts could be the price of doing business in bond markets.
The message - in public addresses, reports to Congress, and even an investigation into market turmoil last October - is that less liquidity is a necessary consequence of regulatory reform and fitting for an economy that is getting ready for tighter monetary policy.
Overall U.S. bond market volatility has risen 60 percent since a mid-2014 low, according to Bank of America Merrill Lynch's MOVE index, which measures the implied volatility of U.S. Treasury markets - a statistic that underscores liquidity concerns.
BlackRock, the world's largest asset manager, has suggested it was time to move on and start devising strategies on trading through the dry patches rather than keep pushing back against tougher regulation.
 |
Banks, including primary dealers who act as market makers for U.S. Treasuries, have slashed bond inventories in the past few years in response to tougher capital requirements, reducing a liquidity buffer for the fixed income market.
Private and public comments by Fed officials show that they do not share Wall Street's degree of concern about liquidity, and do not believe that capital rules are solely to blame for the bond market’s growing tendency to seize up.
Effectively, regulators are telling the industry it is the responsibility of banks, funds and other market players to protect themselves.
"It's hard to find any financial market player who doesn't talk about being concerned about potential liquidity issues," Eric Rosengren, president of the Boston Fed, which oversees many of the country's largest asset managers, told Reuters.
"So it would surprise me if I found that people were using a particular model and didn't use any intuition about what goes into those models, and what might happen if everybody blindly uses those models."
At last week's congressional hearings, Fed Chair Janet Yellen resisted pressure by Republicans to acknowledge that new capital rules were destabilizing markets.
The Fed's assertive stance is setting the stage for more volatile fixed income markets and where liquidity droughts could be the price of doing business in bond markets.
The message - in public addresses, reports to Congress, and even an investigation into market turmoil last October - is that less liquidity is a necessary consequence of regulatory reform and fitting for an economy that is getting ready for tighter monetary policy.
Overall U.S. bond market volatility has risen 60 percent since a mid-2014 low, according to Bank of America Merrill Lynch's MOVE index, which measures the implied volatility of U.S. Treasury markets - a statistic that underscores liquidity concerns.
BlackRock, the world's largest asset manager, has suggested it was time to move on and start devising strategies on trading through the dry patches rather than keep pushing back against tougher regulation.
No comments:
Post a Comment