Has Liquidity Risk in Corporate Bonds Increased?*

Transcription

1 Conference on Corporate Debt Market Structure, Liquidity and Volatility Has Liquidity Risk in Corporate Bonds Increased?* Michael Fleming Federal Reserve Bank of New York November 6, 215 * Based on work with Tobias Adrian, Or Shachar, Daniel Stackman, and Erik Vogt. Views expressed are those of the presenter and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

2 Reasons to Think Liquidity May Have Changed Dealers reduced balance sheets and risk taking Aftermath of crisis, regulatory changes, changes in market structure Technological changes and entrance of new participants October 15 th report (Treasury market) Growth in market and changes in liquidity demand Monetary policy environment 2

3 Overview Dealer positioning Treasury liquidity Corporate liquidity Liquidity risk 3

4 Dealer Positioning 4

5 Trillions of Dollars Dealer Assets Have Stagnated Since the Crisis

6 Billions of Dollars Dealer Corporate Positions Have Stagnated

7 Millions of Dollars Value-at-Risk at Bank-Dealers Has Declined /1/1 7/1/3 7/1/5 7/1/7 7/1/9 7/1/11 7/1/13 7/1/15 7

8 What Explains Evolution of Dealer Positioning? Regulations have tightened markedly Large dealers now BHCs enhanced liquidity & capital requirements Much deleveraging before regulations announced/passed Post-crisis contraction concentrated among riskier and fastergrowing firms pre-crisis Electronification has likely lowered returns to market making 8

9 Treasury Liquidity 9

10 Billions of Dollars Primary Dealer Trading Volume Has Been Stable /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Inter-dealer Other 1

11 Percent Primary Dealer Turnover Has Declined Sharply /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Inter-dealer Other 11

12 Millions of Dollars Trade Size Has Declined Over Time /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 2-year 5-year 1-year 12

13 256ths Bid-Ask Spreads Are Narrow and Stable /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 2-year 5-year 1-year 13

14 Millions of Dollars Millions of Dollars Depth Has Declined from Recent Highs /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 2-year (left) 5-year (right) 1-year (right)

15 256ths per $1 Million Price Impact of Trades Has Recently Risen /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 2-year 5-year 1-year 15

16 Basis Points Yield Curve Fitting Errors are Low and Stable /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 16

17 Treasury Liquidity Caveats/Next Steps Evidence is for interdealer market, not dealer-customer market Evidence is for on-the-run securities, not off-the-runs Little recent evidence of liquidity bifurcation Structural changes may mask liquidity changes Concerns about future liquidity when policy normalizes Concerns really about liquidity risk (not average liquidity) To be discussed 17

18 Corporate Liquidity 18

19 Billions of U.S. Dollars Corporate Bond Issuance At Record Highs Investment grade High yield 19

20 Billions of Dollars Trading Volume Has Increased Modestly Investment grade High yield 2

21 Size (Thousands of Dollars) Number (Thousands) Trade Size Has Declined Average trade size (left) Number of trades (right) 21

22 Percent of Par Realized Bid-Ask Spreads Have Narrowed /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 22

23 Percent of Par Similar Pattern When Weighting by Volume /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Unweighted Weighted 23

24 Percent of Par per $1 Million Amihud Price Impact Has Declined Markedly /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 24

25 Percent of Par per $1 Million Similar Pattern When Weighting by Volume /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Unweighted Weighted 25

26 Percent of Par per $1 Million Similar Pattern Using Signed Order Flow /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Amihud Signed 26

27 Corporate Liquidity Caveats/Next Steps Evidence is less direct than for Treasuries Cannot directly observe bid-ask spreads or depth Evidence is for traded securities (data limitations) Limit analysis to consistent sample over time Structural changes may mask liquidity changes What is happening to dealer holding periods? Concerns about future liquidity or liquidity risk 27

28 Liquidity Risk 28

29 MOVE Index Illiquidity Index Treasury Liquidity, Volatility, and Liquidity Risk /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 MOVE Jump indicator Illiquidity index

30 Number of Jumps Treasury Vol-of-Vol and Liquidity Risk Rising? /1/25 1/1/27 1/1/29 1/1/211 1/1/213 1/1/215 Volatility Illiquidity 3

31 Illiquidity Index Corporate Liquidity and Liquidity Risk /1/24 1/1/26 1/1/28 1/1/21 1/1/212 1/1/214 Jump indicator Illiquidity index 31

32 Number of Jumps Corporate Liquidity Risk and Vol-of-Vol Low /1/26 1/1/28 1/1/21 1/1/212 1/1/214 Volatility Illiquidity 32

33 Number of Illiquidity Jumps Treasury and Corporate Liquidity Risk Co-Move /1/26 1/1/28 1/1/21 1/1/212 1/1/214 Corporates Treasuries 33

34 Liquidity Risk Caveats/Next Steps This is not the only concept of liquidity risk Measures are based on daily changes in liquidity, binary, particular jump threshold, and specific liquidity measures Make greater use of intraday data to assess liquidity risk Consider weighting based on size of jump Measures based on average liquidity across securities May miss important idiosyncratic component for corporates 34

35 Sources Has U.S. Treasury Market Liquidity Deteriorated? Has U.S. Corporate Bond Market Liquidity Deteriorated? Has Liquidity Risk in the Corporate Bond Market Increased? Has Liquidity Risk in the Treasury and Equity Markets Increased? What s Driving Dealer Balance Sheet Stagnation? 35