High-grade credit trading volumes have plummeted in recent weeks, with sell-siders at several fixed-income desks estimating daily trading activity is down more than 30% so far this month from levels at the start of the year. The conventional wisdom is investors are less willing to take risk given spreads have been widening and as a result, bid/offers are also widening, dampening traders' incentives.
Ken Elgarten, head U.S. credit strategist at UBS, highlighted increased event risk due to leveraged-buyout activity, weakness in the auto sector, wild swings in the equity markets and volatility in Treasuries all as sources of concern. "If the market's turning, you outperform if you sit on cash," commented one sell-sider.
Arthur Tetyevsky, managing director at HSBC Securities and a first team Institutional Investor-ranked credit strategist, said trading is very limited because of overhang from the possibility General Motors and Ford Motor Co. will be downgraded to junk. "That's a potential scenario that is paralyzing markets," he commented, noting auto credits in particular are currently very difficult to trade. "It's hard to sell short at these levels, plus you're giving up yield and you're giving up the upside opportunity. And nobody wants to add to their existing positions," he said, referring to autos.
And the market is only getting more and more illiquid. "The phones aren't ringing," noted one high-grade salesman. Another sell-sider said with bid/offer spreads widening, trading desks are becoming more risk-averse, too. "If it's more expensive to transact, then why trade?" questioned one sell-sider at a bulge bracket firm. Tetyevsky estimated in a typical liquid market the average triple-B credit would carry a 5bp bid/offer spread but quotes are currently around 30bp bid/offer spreads for GM and Ford.
Investors have been hoarding an increasing amount of cash for the last eight weeks, according to J.P. Morgan's biweekly survey of 50 institutional investors comprised mostly of asset managers and insurance companies. The survey shows 20% of investors report they are running high cash positions and 63% are holding what they consider medium cash positions.
One such non-buyer is Angelo Maniuodakis, portfolio manager at OppenheimerFunds in Boston, who said he has significant cash position. "We have cash sitting on the sidelines and a lot of room to add if we want to," the manager added, declining to quantify his cash position.
Furthermore, a slowdown in new issuance is also crimping trading because new sales tend to fuel secondary market activity. Stan August, managing director and bank and broker analyst at Banc of America Securities, noted there was not a single business day from March 18 to April 12 in which more than $2 billion in new paper was sold. This is in marked contrast to earlier in the year, when there were only six business days in January with less than $2 billion and eight such days in February under that amount.