The level of US corporate bond market has reached worrying signs. In a search for higher yields than Treasuries, many were willing to dip their fingers there. Two things could shake the calm waters: a rise in US interest rates or a weakening USD. As mentioned by Citigroup below, the unusual factor here is that most of the papers reside with just 3 types of investors. Most worrying are the mutual funds - if confidence is shaken, they could exit in droves, and cause a cascading effect for others scrambling to get out. Watch this space.
NEW YORK: For all the concern
that Wall Street’s shrinking bal-
ance sheets will fuel a liquidity
crisis when investors flee credit
markets, Citigroup Inc strategist
Stephen Antczak said investors
may be overlooking an even big-
ger catalyst.
The size of the US corporate bond market has ballooned by US$3.7 trillion (RM13.84 trillion) during the past decade, yet almost all of that growth is concentrated in the hands of three types of buyers — mutual funds, foreign investors and insurance companies, accord- ing to Citigroup. That combination could lead to more selling than the market can absorb when the US Federal Reserve raises interest rates for the first time since 2006, Antczak said.
The size of the US corporate bond market has ballooned by US$3.7 trillion (RM13.84 trillion) during the past decade, yet almost all of that growth is concentrated in the hands of three types of buyers — mutual funds, foreign investors and insurance companies, accord- ing to Citigroup. That combination could lead to more selling than the market can absorb when the US Federal Reserve raises interest rates for the first time since 2006, Antczak said.
“All the money is going to the
same place, and when something
adversely impacts one, chances
are the same factor adversely im-
pacts everyone else, and there’s
nobody there to take the other
side,” Antczak said in a telephone
interview.
“We used to have 23 types of investors in the market. Now we have three. In my mind, that’s the key driver.”
“We used to have 23 types of investors in the market. Now we have three. In my mind, that’s the key driver.”
The three investor groups hold
almost two-thirds of total corpo-
rate debt, Citigroup data show.
Mutual funds, which are forced
to sell when investors redeem
cash, grew the fastest, more than
doubling their share to 22% in 10
years. Overseas investors now
hold almost a quarter of the mar-
ket. Wells Fargo & Co analysts
warned last month that those
buyers may be prompted to exit
if the US dollar weakens at the
same time bond yields rise. —
Bloomberg
1 comment:
next crisis? how can there doom doom gloom the world when there is no boom boom shake the room?
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