Validating second-quarter concerns that the secondary market would face a slow slog through the summer months, U.S. dealers reported another sharp drop in corporate-bond inventories over the latest reporting week, dovetailing with notable drop in trading volume this month.
Dealer holdings of corporate securities due in more than one year fell nearly $5 billion, to $37.5 billion as of July 11, and holdings of all corporate securities sank below $60 billion, both marking new lows dating to the first quarter of 2002, according to latest data from the Federal Reserve Bank of New York.
For reference, holdings of long-term corporate securities totaled roughly $80 billion a year ago and were as high as $95 billion in the first quarter last year, before banks began slashing their holdings over the back half of the year as the eurozone debt crisis percolated and regulators plied tougher risk-based capital requirements.
Long-term positions peaked at $235 billion in the summer of 2007, and trended sharply lower after the Bear Stearns collapse.
Without liquidity backstops in the dealer community, investors remain wary of taking on exposure to securities with weaker liquidity characteristics, participants say.
Barclays analysts warned in the first quarter that liquidity has “become increasingly concentrated among the most active parts of the market, making large parts of the market very difficult to trade, as dealers decreased their corporate bond inventories ahead of anticipated regulatory changes.”
As reported, trading volume has averaged less than $10 billion per session on the high-grade secondary market so far in July, down from a July 2011 average of roughly $11 billion, and on track for the lowest average since the $8.6 billion in December 2011, according to MarketAxess. The decline in trading volume comes after a marked decline in the turnover rate for high-grade corporate bonds in the second quarter, underscoring the disproportion of trades in relatively few larger-scale issues. – John Atkins