credit Markets

‘Stay Liquid’: Negative Microstructure Seasonality Could Be Particularly Acute In 2019

"Trading volumes and liquidity measures should exhibit strong seasonality".

Does the recent improvement in risk sentiment predicated on good vibes around the “Phase One” Sino-US trade deal and ostensible “progress” on Brexit make the case for going out on a limb and leaning into the illiquidity premium in corporate credit?

In a word, “no”.

Or at least not according to Goldman, whose credit team reminds you that “the value proposition of owning illiquid risk is weak”. We touched on this a while back, and the bank delivered a short update on the subject Thursday.

“While sentiment vis-à-vis trade tensions has somewhat improved, the IG illiquidity premium, which we proxy by the excess spread embedded in illiquid bonds relative to liquid bonds, has further widened”, the bank notes.


For Goldman, it’s likely that between the still tenuous outlook for global growth (and really, one could simply say that the outlook is deteriorating by the week, a few “green shoots” here and there notwithstanding), sky-high policy uncertainty and relatively expensive valuations, there’s plenty of room for illiquid credit to underperform.

The outlook for illiquid credit risk is made worse by what Goldman describes as “the more fragile post-crisis market microstructure”. Indeed, if there’s any time when one should “stay liquid” (so to speak) it’s headed into Q4.

“The past three years have seen trading volumes and liquidity measures exhibit strong seasonality, deteriorating in 4Q before subsequently improving in 1Q of the following year”, Goldman warns, adding that 2019 likely won’t be an exception.

If you’re wondering what to blame for that, one place to start is G-SIB buffer thresholds.

“GSIB constraints encourage dealers to shrink the overall size of their market making activities”, BofA’s Mark Cabana reminds you, on the way to noting the following in a Friday note:

As of Q2 ‘19, four of the eight GSIBs were in a higher GSIB surcharge bucket versus 2018 year end (Table 4). The fact that there are four US GSIBs running high in their surcharge bucket as of Q2 ’19 stands in stark contrast to the fact that there was only 1 US GSIB that was running high in its target range as of Q2 ’18. This suggests there will likely be greater year-end funding strains in ’19 vs ’18 regardless of how the Fed manages their reserves.

The point: The Fed’s efforts to ameliorate the situation aside, there are significant questions about what Q4 will bring in terms of structural stress and how that will impact liquidity provision and thereby markets.

The only thing anyone knows for sure is that there will be a negative seasonal effect.


6 comments on “‘Stay Liquid’: Negative Microstructure Seasonality Could Be Particularly Acute In 2019

  1. Clawbongo says:

    how can u write about GSIB’s and not define the term? Or did I miss it?

  2. Clawbongo says:

    I suggest having a glossary embedded in each article to define all the acronyms used within, especially since there are usually an overwhelming amount.

    • Anonymous says:

      Perhaps its better to not know, for if we were to all school ourselves on the stark realities of our financial system, we’d all immediately liquidate everything we owned and flee the country.

  3. Dana Newman says:

    Excerpts from Chapter XL
    Wall Street Stock “Market.” A “fixed” Monte Carlo. The game exposed in detail.
    U. S. Attorney-General’s strange opinion.
    beginning at page 185

    But, unfortunately, on Wall Street everything is artificial. Nothing is natural or logical; therefore the unexpected always is happening. Every effect is the result of a planned and purposeful cause. Whatever is done usually was intended, procured. If prices soar to the swallows’ nests, they were put up there. If they slump to the coal cellar, they were dumped there. And only the few big inside operators know which will be done on any particular day. Consequently everybody else in the United States who either speculates or invests in “listed” securities is merely gambling blindly, recklessly, without the slightest knowledge or chance of knowledge.
    A mere guess as to whether that day the masters of the machine will decide to lift the lever up or push it down. And he will not and cannot know, or have the slightest idea or inkling until after, figuratively, he has dropped his money in the slot, made his bet, heard the whirl of the unseen wheel behind the impenetrable curtain, and the attendant, “the broker” opens the little peek-hole and, as usual, calls out : “You lose ! Try your luck again.”

    Such a dark pool always is formed and operates in absolute secrecy. Often its members themselves do not know the plays to be made from day to day with the common funds for mutual benefit. That is a “blind pool” only the manager, usually one of the pool members, knows the moves made or to be made. A pool of that character has the price of that stock, the welfare of the corporation, its stockholders, officers, employees, and the public absolutely at its mercy, and yet no one outside of the pool itself even can know of that fact. Sometimes it is a long, exhausting, wearing, heartbreaking, strangling struggle. Often it is just a quick, deep stab in the dark, always from behind, and all is over. The guilty never are caught or detected or even suspected, for the stock exchange is created and operates to hide the identity and completely screen the actions of the bandits of high finance.

    Very often the different pools manipulating the various stock and bond issues of the many trusts and other corporations quietly put their heads together and cooperate, or conspire. The whole list of price quotations goes up, a “bull” movement, or down, a “bear” movement, according as has been predetermined. The public that owns most of the securities but does not know until too late which way prices are to be put is, of course, always fleeced, the profits going to the insiders. In fact, it is the regular practice of the manipulators to put out hints and “tips” through the daily press and otherwise to cleverly induce the uninformed public always to take the wrong side of the market, and lose. Sometimes dividends are increased and decreased for the purpose of manipulating quotations for the speculative profit of “insiders.”

    An honest, legitimate trading market for securities would be a useful national blessing. But the Wall Street Monte Carlo, in its practice and results, is the most colossal, crooked and financially dangerous den of gamblers and robbers the world ever has seen or dreamed of.

    In this and other ways “high finance” silently and constantly and irresistibly harvests an ever increasing portion of the fruits of all human toil and effort. Yet the methods and means employed are so secret and mysterious, the victims may not even realize they have been intentionally victimized, and never would suspect the right parties in any event. Indirectly most of the losses fall on the people who never buy stocks at all.
    It is “high finance” against people, with the cards always “stacked,” the game always “fixed.”
    It is hard for the people to figure out just how it is worked, but a large portion of the prevailing high prices is due to the machinations in one way or another of “high finance.” The inflation of the volume of securities out of all proportion to assets, increase in interest rates on billions upon billions of dollars of municipal and corporation bonds and upon the loans of bank credit, are some of the agencies used, the extra burden falling always and only upon the people.

    U. S. money vs. corporation currency, “Aldrich plan.”
    Wall street confessions! Great bank combine (1912)
    Author: Crozier, Alfred Owen, 1863-1939

    View the book here:

  4. vicissitude says:

    Any reserve clues @ Wells? **

    September 27 2019

    At Wells Fargo, a critical first step for Scharf will be to work with the Federal Reserve to get a regulatory cap on the bank’s assets lifted, analysts said. The company’s assets have been capped at $1.95 trillion since February 2018.

    “If we get to the end of the year and these issues are still outstanding, it will raise a question in our minds as to how long these issues will be out there,” said Christopher Wolfe, managing director and head of North American banks at Fitch Ratings.

    It appeared Friday that Wells Fargo’s regulators, who were widely seen as having played a significant role in Sloan’s abrupt departure, also played a larger than usual role in the process of finding his successor.* The bank said that the Office of the Comptroller of the Currency issued a supervisory nonobjection to the choice of Scharf, and that the step was required under an April 2018 consent order between the bank and the agency (hmmmm).

    In addition, Wells will pay Scharf a one-time stock award worth nearly $26 million to replace compensation that he forfeited for leaving BNY Mellon.

    Scharf’s annual target compensation was set at $23 million, Wells Fargo said Friday in a regulatory filing, which is 40% higher than Scharf’s $16.5 million target pay in his final full year at BNY Mellon.

    Menatal note, the Chairman of Wells is Elizabeth Duke, former Board of Governors of the Federal Reserve System from 2008 through 2013)

    ** Wells Fargo is under Federal Reserve orders to keep its assets below $1.95 trillion until governance and controls improve. Chief Executive Tim Sloan said the bank, now the fourth-largest U.S. lender by assets, is making plans to operate under that limit for the first part of 2019.

    *** “What happened at Wells Fargo was outrageous. The underlying problem at the firm was a strategy that prioritized growth without ensuring that risks were managed, and as a result the firm harmed many of its customers,” Powell said in the letter dated Nov. 28 to Sen. Elizabeth Warren, D-Mass.


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