November 13, 2015
There is a heavy sentiment of worry over the liquidity of the bond market, which caused Goldman Sachs’ Charles Himmelberg and Chris Henson to pen a letter to their clients about the possible consequences.
According to data from the New York Fed, dealer inventories of investment-grade corporate bonds are negative, standing at $1.4 billion worth on their balance sheets (for bonds with maturities of more than one year, but less than five). Although this is standard for government bonds, it is an unprecedented status for corporate bonds.
Due to higher capital standards and an increased cost in hedging debt, dealers are less inclined to take risks on principals. Instead, dealers are more likely to match buyers and sellers in their bids, in turn, narrowing the bid-ask spread.
With interest rates near zero and inflation missing its 2% goal, the market is flooded with debt that investors have flocked towards for the long-term.