At the beginning of the month everyone was wondering how high the government obligations of respected nations could go. Their ascension has come with an under current of foreboding warnings of "shortage" and "hoarding." Long ago, we posited that the concept of "too few bonds (usually promoted because a CB was buying them)" was a meta-issue. A classic case of "sounds right economics."We have, on the other hand, been a bit of a worry wart about liquidity. Any C Team player now understands that Volume is not Liquidity, so now we can look at the issue more clearly.
And David Schawel pinged this:
"Definitely the first to highlight this issue twitter.com/tracyalloway/s…
(Twitter confessions). I'm so tired of the bond market liquidity story. Been hearing and writing about it for 3 years tinyurl.com/lhbu7z"
Tracy is a respected journo and David is a sharp player. I'm not convinced that just because the negative impact of the liquidity change hasn't manifested itself we should be writing it off. PDs have decimated their FI desks, especially in Govies. FF transactions have fallen off a cliff. A whole generation of "T Traders" experience now revolves around bidding a dutch auction and pitching your allotment to the Fed. Not exactly Mensa candidate work. Few have EVER had to actively participate in a Bear. The Taper Tantrum did kinda - sorta happen.
There was an old expression in the Eurodollar Pit (yes, I'm that old); where volume seemed to increase no matter what and then a crisis would pop up, "There's plenty of liquidity until you need to tap it." Then, things just reprice. Bond shortage? i still say "Challenge." Aunt Janet could help you out with a few trillion if you ever freaked hard enough for them. Bond liquidity? Color me skeptical. There may not be "bad bonds, just bad prices" but those prices can get thin and wide on the way down.