Stability-Liquidity Tradeoffs in Post-Crisis Bond Markets

Transcription

1 Stability-Liquidity Tradeoffs in Post-Crisis Bond Markets PRE- SET TEMPLATES & USAGE TIPS Darrell Duffie Graduate School of Business, Stanford University Brookings, November 17, 215

2 A stability- liquidity tradeoff Capital and ac6vity rules have improved bank stability and reduced commitments of bank- affiliated balance sheets to financial market intermedia6on. This raises incen6ves for agency intermedia6on, CCPs, all- to- all trade, shadow- bank intermedia6on, and a shid by banks away from low- risk standardized (low- margin) products. The net impacts on market efficiency are s6ll playing out, and depend on other factors, including monetary policy.

3 Treasuries bid- ask spreads are stable 9 2- year 5- year 1- year ths /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Source: Adrian, Fleming, Stackman, and Vogt (215) (BrokerTec data)

4 Treasury note trade price impacts 2- year 5- year 1- year ths per $1 million /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Source: Adrian, Fleming, Stackman, and Vogt (215) (from BrokerTec data)

5 Symptoms of changing liquidity Tradi6onal liquidity measures such as price impact and bid- ask spread look fine. Turnover and trade sizes are generally down. Single- name CDS and matched- book repo markets are withering. The 1- year Treasury note yield crash of October 15, 214 is a symptom of changes in the mix of intermediaries, including HFT.

6 Trade size has declined 2- year 5- year 1- year 25 2 Millions of Dollars /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Source: Adrian, Fleming, Stackman, and Vogt (215) (BrokerTec data)

7 Treasury market turnover Daily volume/outstanding Data source: SIFMA

8 $ millions 2 Year 5 Year 1 Year Note: 21-day moving average; 8:2-15: ET Source: Staff calculations, based on data from CME Group.

9 Decline in GCF net lending volume $ billions Daily Net Cash Positions by Dealer Group Monthly Average Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 month Non-BHC Dealers Small BHC dealers Large BHC Dealers 21

10 Corporate bond average bid-ask spreads $1.4 $1.2 Investment Grade High Yield $1. $ per unit par $.8 $.6 $.4 $.2 $ Copyright 214 FINRA

11 Corporate bond average trade size , Most Active Bonds Less Active Bonds $ million Copyright 214 FINRA

12 Turnover of corporate and municipal bonds Daily volume/outstanding Municipal bonds Corporate bonds Data source: SIFMA

13 6 When more dealers compete, corporate bond trade costs go down Investment Grade 5 4 High Yield Cost in Basis Points Number of dealers responding Source: Hendersho` and Madhavan (214)

14 Number of CDS trades per quarter 4, 35, Single- Name Index 3, 25, 2, 15, 1, 5, Data source: DTCC

15 Who handles U.S. bonds? 4 35 Bond Fund+ETF Dealer Bonds Financed Assets (billion USD) Data sources. ICI: AUM, bond mutual funds + ETFs. FRBNY: primary dealer daily financing (securi6es out) of UST + agencies + MBS + corporate bonds.

16 Net monthly cash inflows to bond funds 4 2 Billions of dollars - 2 1/1/13 3/1/13 5/1/13 7/1/13 9/1/13 11/1/13 1/1/14 3/1/14 5/1/14 7/1/14 9/1/14 11/1/14 1/1/15 3/1/15 5/1/15 7/1/15 9/1/ Data source: Investment Company Ins6tute

17 $ billions Note: Total net monthly flows; Some funds own agency debt securities and MBS in addition to Treasury securities Source: Staff calculations, based on data from Morningstar.

18 Asset management stability issues Comments on the risk of a crisis arising from sudden bond fund redemp6ons seem exaggerated. A rush for the exits would impact prices, but bids will likely arrive before a crisis is triggered. Who exactly would fail? Large hedge funds present a poten6al for unwind risk, given their reliance on leverage and expert porkolio managers. Large agency- based managers seem more benign, and have not been designated as SIFIs. Regulators also focus on insurance firms that are ac6ve in financial markets. Some have been designated. Money- market funds are migra6ng to government securi6es

19 Supplementary content

20 Depth has declined from recent highs year 5- year 1- year 2 Millions of Dollars /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Source: Adrian, Fleming, Stackman, and Vogt (215) (from BrokerTec data)

21 T- note mul6lateral plakorm volumes Daily volume (billions of dollars) year 5- year 2- year Source: Fleming (214) (BrokerTec data)

22 FX dealer versus non- dealer volumes Daily trade volume (billions of USD) Dealers Non- dealers Source: Rime and Schrimpf (214) (BIS data)

23 Some remaining system vulnerabili6es Improving but s6ll fragile design of tri- party repo leaves the poten6al for repo fire sales. Lending of last resort is overly limited by Dodd- Frank. Poten6al for pro- cyclical margins, pending new FSB standards (more research needed).

24 U.S. tri- party repo collateral and liquidity Type (9th percen6le haircut) CMO Treasuries (2.%) Agency MBS (3.%) Agencies (3.%) Agency CMO Agencies Agency MBS Treasuries Money market (5.%) Agency CMO (11%) IG Corporate (9.%) Equi6es (15.%) HY Corporate (15%) CMO (Private) (2%) Other Data source: FRBNY, November, 215 h`p://newyorkfed.org/data- and- sta6s6cs/data- visualiza6on/tri- party- repo/#interac6ve/volume

25 US GSIFI FHC Zone of stays on failure terminanon of swaps, repos, sec- lending U.K. Broker Dealer U.S. Broker Dealer U.S. Bank Counterparty

26 Daily average volume of interest rate deriva6ves 16 US- OTC US- EXCH UK- OTC Daily average volume ( $ billions) Data sources. BIS: OTC Triennial (April), U.S. exchanges Table 23A (March).