Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Gold Price Trend Forcast to End September 2019 - Video - 25th June 19
Today’s Pets.com and NINJA Loan Economy - 25th June 19
Testing the Fed’s Narrative with the Fed’s Data: QT Edition - 25th June 19
What "Pro Traders" use to Find Profitable Trades - eBook - 25th June 19
GDX Gold Stocks ETF - 25th June 19
What Does Facebook’s LIBRA New Crytocurrency Really Offer? - 25th June 19
Why Bond Investors MUST Be Paying Attention to Puerto Rico - 25th June 19
The Next Great Depression in the Making - 25th June 19
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Rush Hour! A Bond Market Traffic Jam

Interest-Rates / US Bonds Apr 28, 2015 - 03:37 PM GMT

By: Harry_Dent

Interest-Rates

Rodney Johnson writes: In the early 1990s I was a young bond trader with a Wall Street firm. 

The business was not exactly like the movies, but it wasn’t too far off, either. We got to work by 7:00 a.m., set the strategy for the day — “Are we buying more or selling more?” — and then got on the phones. 


The job was basically poker over the phone, trying to outbid or slightly underbid the competition, depending on the marching orders. We committed millions of dollars with no contract, no signatures, no documents… just a short statement of: “You’re done!”

At the end of the day, we’d often retire across the street to a small bar that catered to our business. We’d swap war stories of who got stuck with what bonds, or who stole inventory from whom, and then after a few rounds we’d start to slip away, back to our apartments or homes. 

The next morning, we’d be at our desks by 7:00 a.m. sharp to do it all over again.   

Those days are long gone for me, and now they are fading away in general. Even though there are more bonds outstanding than ever, not only are traders disappearing, but so are trades. When interest rates start to walk higher, this could pose a significant risk to individual investors. 

In 2007, the top year for daily bond trading volume, there were $32 trillion of bonds outstanding. This included $4.5 trillion of U.S. Treasury bonds (net of what is owed to government trust funds), as well as $5.2 trillion of corporate bonds. 

In the years since, the U.S. government has run record deficits while corporate America has taken advantage of record-low interest rates. Bonds outstanding have ballooned to $39 trillion, including $12.5 trillion of U.S. Treasurys and $7.8 trillion of corporate bonds. 

With more bonds available, it stands to reason that trading volume would increase, but that hasn’t been the case.

Even though bond issuance has mushroomed, daily trading volume has contracted. From its peak of $1,036 billion in 2007, daily trading volume declined to $730 billion at the end of 2014.

Today, more of it is happening on electronic platforms matching end buyers and sellers, skipping trading desks altogether. Over the last seven years, the Primary Dealer banks have cut their bond trading volume by 75%, due to increased pressure from capital requirements placed in the aftermath of the financial crisis. That leaves a lot of empty desks. 

Over the past seven years this has not been a problem, since there hasn’t been much demand to sell bonds! Interest rates haven’t gone straight down, nor prices straight up, but the clear trend has been higher prices, which rewards buyers, not sellers. Without a lot of volatility or shocks to the system, investors haven’t been running to brokers to sell their bonds en masse.

But that could change in the months ahead, particularly if the Federal Reserve actually goes through with a rate hike or two.

With interest rates moving up and bond prices falling, it stands to reason that at some point many investors would choose to sell their bonds. Once interest rates stabilize, they’d then try to buy them back at lower prices. 

In the past, this was as simple as calling a broker, getting a bid from a bond desk, and confirming the trade. But what happens if there are no traders, or they say they can’t bid on the bonds because it would put them over their trading limit? The bonds would have to be put “on the wire” — which means offering the bonds to other trading desks and investors — in the hopes of attracting favorable bids. 

With so many entities shrinking their inventory, it is likely that a rush to sell bonds will overwhelm potential buyers, which would cause bond prices to gap even lower. This could lead to a death spiral in prices, where investors who just want to get out hit falling bids. In this scenario, the price of the entire market for that bond would reset, inflicting pain on everyone else who still holds it. 

And it could get worse. 

Individuals who hold bonds directly can choose whether or not to take a bid. If the number is too low, investors can step away and come back another day, trying to get more money for their bonds. 

But today over $250 billion worth of bonds are held in exchange traded funds (ETFs), which trade like stocks. . When investors are net sellers of ETFs, a few firms can hold some of the excess inventory for a while, but eventually the ETFs are broken up and their individual holdings sold at market prices.

If a lot of bond ETF shares are sold, then a lot of bonds that used to be inside those ETFs will be out for the bid! With big trading firms no longer carrying high inventories, the increased volume of bonds for sale will drive prices down further than they would have in years past. 

As the days of 2015 pass and we get closer to the Fed raising interest rates — be it in June, September, or even year-end — investors holding bond ETFs should review what they own. As bond prices fall, ETFs could suffer much greater volatility than expected… because when the call is made to get a bid on the bonds, it’s possible no one will be there to answer the phone.

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Follow me on Twitter @HarryDentjr

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.

Copyright © 2015 Harry Dent- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Harry Dent Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules