Bond Market Illiquidity: There’s A Very Small Door!

Imagine a concert venue with general admission seating, a famous band, and one small door to get inside. The result would likely be catastrophic!

Is a similar scenario brewing only this time in the financial markets, bonds in particular?

For the fund managers and other institutional investors who hold trillions of dollars of fixed income across the risk spectrum, at this point in time the prospect of illiquid markets is one of their greatest fears!

When no ‘bid’ or offer to buy is readily available because sellers swamp buyers, prices can drop hard and fast with a commensurate rise in yields.

For homebuyers looking to finance a purchase with a mortgage, the resulting rise in mortgage rates from a sell-off could spell the difference between qualifying and not qualifying!

Add to the lack of liquidity mix the fact that some fixed income sectors, municipal bonds come to mind, are thinly traded and somewhat inefficient to begin with, and the analogy to the concert venue has the potential to become a reality.

And further compounding the sell-off scenario is the question of whether selling that begets selling will increase the counter-party risk in the trillion dollar-plus (no one really knows the size for sure) derivatives market?

…Derivatives are a $1 quadrillion ticking time bomb, soaked in gasoline and sprinkled with gunpowder. The volatility we are now seeing are the matches! While we have had two “saves” where the central banks have stepped in and bought debt to steady the markets, the day will come when it does not work. This game has gone on for a very long time and resulted in a mania where most all of the players are “long”. The only potential new longs left are the central banks themselves who can only buy more debt with money created by debt. The day will come when the ability to “save” is overcome. Along with it will come the freedom of prices created by Mother Nature herself. Stocks, bonds, currencies, commodities and yes, even silver and gold will finally break the chains…‘ (Source)

Finally, when a mainstream bond fund manager who you would expect to tell you that any sell-off represents a buying opportunity, suggests something altogether different, investors should sit-up and pay attention.

From Zero Hedge

The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress.

Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock.

“Systemic risk is in the system and as an investor you have to be aware of that,” he told Telegraph Money.

The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager.

He pointed out that a saver was covered only up to £85,000 per bank under the Financial Services Compensation Scheme – which is effectively unfunded – and that the Government has said it will not rescue banks in future, hence his suggestion that some money should be held in physical cash.

He declined to predict the exact trigger but said it was more likely to happen in the next five years rather than 10. The current woes of Greece, which may crash out of the euro, already has many market watchers concerned..

Mr Spreadbury’s views are timely, aside from Greece. A growing number of professional investors and commentators are expressing unease about what happens next..

“The problem is that people are struggling to work out how to diversify if QE programmes stop,” he said.

Mr Spreadbury added: “We have rock-bottom rates and QE is still going on – this is all experimental policy and means we are in uncharted territory.

“The message is diversification. Think about holding other assets. That could mean precious metals, it could mean physical currencies.”


Article author Michael Haltman is the President of Hallmark Abstract Service in New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.

For anyone either buying or refinancing a property your attorney will likely recommend a title insurance provider, although you always have the right to choose your own (click here to learn more)!

If you have any questions you can reach Michael by email at

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