8.5.14: Is Liquidity Becoming an Issue for Fixed-Income Markets ?

Having been fortunate to be invited to a fixed-income roundtable this morning to hear John Miller of Nuveen’s High Yield Muni Fund, Denise Simon, Managing Director at Lazard Asset Management, who is responsible for Emerging Market Debt, and Richard Gilmartin (no relation) of Wellington, although it could be attributed to no speaker individually, the underlying tenor of the comments indicated that the fixed-income markets could be seeing a growing liquidity issue.

One of the speakers noted that recently they had put $2 million in bonds out for bid, and it moved the quoted prices.

Given the size of these firms and the dollars under management, I cant believe that $2 ml is a big position to put out for bid-wanted.

Here is a piece Josh Brown published on Twitter today on Goldman’s recent call, which may be tangential to the discussion.

Gary Morrow, a well-known technician and I were chatting last night about the air pockets seen in some CEF’s like JRO, and others yesterday. JRO fell 2% yesterday, even though curve steepening should help the floating-rate complex. JRO remains above the 50 and 200-day moving averages, technically.

Our fixed-income portfolio’s are currently split between individual muni bonds, of pretty high credit quality, JRO, a closed-end bank-loan fund of Nuveen’s, some closed-end muni funds of Nuveen and Blackrock and some short duration, muni and taxable bond funds of Blackrock and PIMCO. Clients are also hedged against higher rates via the TBF, the unlevered inverse Treasury ETF.

We have a little muni high yield (Nuveen’s managed by John Miller which has been a stellar performer this year), but no taxable high yield, which we have been out of for most of 2014. As of yesterday, the high-yield ETF, HYD, was actually yielding 20 basis points more than the HYG or the taxable high yield ETF, which is one indicator of the relative attractiveness of muni’s over corporate’s today.

Most equity corrections are preceded by credit-spread widening and this correction is no different. Taxable high yield took a beating last week.

We are staying with higher-quality funds, CEF’s, and asset managers for clients.

Liquidity risk is hard to pick up on from the retail perspective.

I had to say when I heard that this morning, it made me a little nervous.

Could this be due to the Fed taper ? Could the withdrawal of $10 bl per month, be having that much of an impact ?

My friend, Jeff Miller of NewArc Capital and a great blogger once told me that the QE was less than 1% – 2% of total Treasury volume every month, so you wouldn’t think that “taper” would be the cause of this sudden tightening of liquidity.

Needless to say, our antennae our elevated.

This could still be a very normal SP 500 correction. It was badly needed, and late July, August and September are the seasonally worst months for stocks as it is.

After this correction, given the underlying strength in corporate earnings, i.e. SP 500 earnings, I’m expecting the typically strong 4th quarter for 2014.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager





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