US HY

Liquidity can be fickle: abundant during benign markets and nowhere to be found in more challenging periods.  Wall Street titan Credit Suisse has been reminded of that core market insight as the firm has endured $750 million in write-downs on holdings of distressed debt, leveraged loans, and securitized products in recent months as its traders struggle with vanishing liquidity in the high yield market.  It is difficult to trade out of troubled positions when, according to Lisa Abramowicz of Bloomberg, nearly 40% of the $1.4 trillion U.S. high-yield market did not trade at all in the first two months of 2016.

Bond market liquidity has been a point of concern for market watchers in recent years, and for good reason.  The combination of post-recession accommodative central banking policy and financial market regulation has driven a rapid expansion of the high-yield credit market while simultaneously creating strong disincentives for banks to provide their traditional market making role.

The absence of liquidity represents another “finger of instability” in the markets, and could set the stage for further disruptions in the months to come.

About the Author:

David Johnson is a career change agent who has served as interim manager or financial advisor on over $5 Billion of distressed middle market transactions.  He can be contacted at: david@abraxasgp.com or 312-505-7238.