There's something surreal going on in the market

There’s something surreal going on in the market.

The bond market has exploded in size, and yet market-makers — firms charged with making sure buyers and sellers can get the trades they need — are holding fewer bonds on their balance sheet, which makes life difficult for investors looking to make big trades.

That means that liquidity, or the ease with which investors can buy and sell positions, has deteriorated.

And it has now gotten so bad that liquidity in the credit market in the developed world is now worse than it is in emerging markets, according to Edward Misrahi, the founder and chief investment officer of RONIT Capital.

That marks a turnaround, as emerging markets have historically been much harder to trade. That is because these markets are typically less well developed, and the investor base is less stable.

“I think it is a bigger problem, honestly, I think it is a bigger problem for developed market credit market than for emerging markets,” Misrahi said in an interview with Raoul Pal of Real Vision TV.

He went on:

We see credit markets that are just surreal. Companies that have sold $1 billion bonds, if you sell $2 million it is a problem. The intermediaton system has basically disappeared. Regulation has made banks very unwilling to make markets.

And added:

You just have to see how many bonds get issued, and 95% of bonds get bought by four people who put it away. Those four funds that put it away are mostly mutual funds with daily liquidity, which means that if for whatever reason rates do go up … and suddenly there are outflows from all these people, I don’t know what is going to happen. That is the bit that worries me more.

Misrahi was a partner of Goldman Sachs in New York before he cofounded hedge fund Eton Park. He then left the firm to start RONIT Capital, a London-based firm that focuses on emerging-markets.

He isn’t the first investor to complain of reduced liquidity, of course. Wall Street executives complain about the dearth of liquidity so often that Bloomberg’s Matt Levine has a section in his daily email dedicated to detailing their gripes.

But Misrahi’s take is an interesting one. For liquidity to be worse in developed market bond markets than it is in emerging markets, well that’s saying something.

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