‘Come the next financial crisis, you will not be able to escape to the buy-side, brother. You will not be able to quit banking, continue to get paid, and work for a friend’s hedge fund. You will not be able to lose yourself in Geneva and skip out for a holiday in Mauritius during quiet times. Because the next financial crisis will not be on the sell-side. The next financial crisis will be in mutual bond funds.’
Ok, so Gil Scott-Heron doesn’t exactly scan when it comes to financial issues. But you get the impression. There is growing agreement that the next financial crisis will result from a ‘liquidity event’ involving the corporate bond markets. The chart below, taken from Morgan Stanley’s epic banking report, explains why this is. The volume of bonds held in mutual funds has soared since 2011, but the volume of bonds held by dealers and brokers as inventory has dwindled. If mutual funds need to sell their holdings, fast, they will have a very serious problem….