Trading hampered as buyers flee to crowded exits

The lowest volumes for U.S. corporate-bond trading since 2008 are underscoring the potential for market disruptions as regulations prompt dealers to retreat.

August trading volumes have plummeted to a daily average of $14.1 billion, down 9% from the corresponding period last year, even as the amount of company debt outstanding has soared by 12%. Bonds have lost 5% since the end of April on the Bank of America Merrill Lynch U.S. Corporate Index, the worst stretch since the credit crisis as the Federal Reserve considers curtailing its record stimulus.

Exiting from fixed-income securities is getting tougher as the world’s biggest bond dealers respond to new capital standards, reducing inventories of the debt by 76% since the peak in 2007. Even as lenders from Goldman Sachs Group Inc. to UBS AG create electronic-trading platforms, investors are failing to find relief from waning liquidity, according to a July report by the Treasury Borrowing Advisory Committee.

“You’ve got to be very wary of getting into a crowded position,” Stephen Antczak, the head of U.S. credit strategy at Citigroup Inc. in New York, said in a telephone interview. “If everybody has the same mandate, who’s going to take the other side of the trade? If far more guys are mark-to-market sensitive than they used to be and you overlay the lack of liquidity, that kind of exacerbates the problem.”

Basel Committee

Investors are souring on the debt after pouring almost $950 billion into corporate-bond mutual and exchange-traded funds in the wake of Lehman Brothers Holdings Inc.’s collapse in 2008, when the Fed started expanding its balance sheet to suppress borrowing costs, Citigroup data show.

The unprecedented growth of funds that publish market prices of their assets daily has changed the dynamic of credit markets, with investors more inclined to redeem funds as sentiment deteriorates, Antczak said. The funds now account for more than 40% of the debt’s owners from about 25% in 2007, Citigroup data show.

While the biggest banks used to provide a cushion from plunging debt values, they’re less willing to fill that role after the 27-country Basel Committee on Banking Supervision raised minimum capital standards, boosting the cost of owning riskier assets.

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