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Potential Bear Catalyst

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.

“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.”

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 


James Fernandez said…
next crisis? how can there doom doom gloom the world when there is no boom boom shake the room?

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