If you’re nervously inclined, you might be worried about the coming liquidity crunch in the bond markets. Bloomberg points out that the size of the US corporate bond market has ballooned by $3.7 trillion over the past decade and that the concentration of these new securities in the hands of a small class of investors (mutual funds, insurance funds and insurance companies) threatens to create a liquidity crisis if they all attempt to exit at once.
Bloomberg isn’t the only place sounding alarm bells. Anshu Jain said much the same while he was still CEO of Deutsche Bank last week.
Analysts at Barclays have also put together a handy flow chart on the issue. Shown below, it also indicates where to work if you want to survive this impending doom.
Source: Barclays (h/t Tracey Alloway)
If you work in credit sales and trading, it seems that now is the time to get into index-based portfolio products. Think exchange traded funds (ETFs). Think total returns swaps (TRS). Think tradable credit default swap (CDS) indices like CDX. Look at the final two boxes above.
Credit traders had a tough first quarter, if Barclays and others are right, they’ll also have a difficult rest of the year.