I tre grandi rischi 2023 (2): ancora sulla liquidità
Abbiamo inaugurato questa serie di Post lo scorso 22 ottobre, e proseguiamo oggi restando sul tema di quel primo Post. La serie, nel suo insieme, affronterà tre argomenti:. liquidità, il costo reale del denaro, ed il credito.
Perché proprio questi tre temi?
Non siamo i soli, noi di Recce’d, a ritenere i tre temi fondamentali per la gestione degli investimenti nel 2023. Temi dalla cui evoluzione dipende poi l’evoluzione di medio termine degli indici di mercato (azioni, obbligazioni, valute e materie prime), i rendimenti attesi ed i rischi futuri che sono gli elementi alla base della costruzione e gestione di qualsiasi portafoglio titoli.
Qualche lettore a questo punto potrebbe chiedersi: “ma che mi importa? io voglio solo sapere se comperare il dollaro o l’euro, se compere azioni e vendere obbligazioni, e così via”.
Quel lettore si sbaglia: si sbaglia del tutto. Gli articoli che iniziano e finiscono con “compra questo e vendi quello” sono totalmente inutili e spesso dannosi. Invece, si fa un servizio al lettore quando si scrive e si analizza dei fattori che aiutano a decidere se “comperare” oppure “vendere” sui mercati finanziari.
Ed ecco la ragione per la quale i nostri tre temi sono temi da comprendere, ed approfondire al massimo che è possibile. Come sempre è stato, nella storia dei mercati finanziari, i soldi si fanno soltanto se si è capaci di cogliere le autentiche OPPORTUNITA’: e come sempre è stato, le autentiche opportunità di guadagno stanno proprio là dove tutti NON guardano, stanno là dove nessuno volge lo sguardo e presta attenzione, stanno là dove tutti vi dicono che non c’è nulla da vedere.
Ripetiamo che i tre temi di questa nostra serie di Post sono:
la liquidità dei mercati
il credito (inteso come “costo del credito”, del fare credito)
il costo ufficiale reale del denaro, ovvero il “time-value of money”
Per i lettori del sito, gratuitamente, Recce’d offrirà in successione la propria analisi di questi tre argomenti. L’analisi sarà presentata in forma sintetica, mentre per gli approfondimenti e le estensioni dovrete contattarci attraverso i canali del nostro sito che già conoscete.
Torniamo oggi sul tema “liquidità”, già tratto nel primo Post della serie.
La ridotta liquidità dei mercati non sta, oggi, sulle prime pagine dei quotidiani: neppure l’inflazione si trovava in prima pagina, nel novembre dello scorso anno. Oggi sulle prime pagine dei quotidiani, e alla TV CNBC, si parla e si scrive soltanto del “pivot”, mentre Recce’d da molti mesi ha preparato i suoi portafogli modello, e consigliato i suoi Clienti, in merito al fatto che il “pivot” conta assolutamente nulla, per i rendimenti futuri ed i rischi futuri degli asset finanziari. Leggendo questo Post (ed il precedente della serie) vi sarà chiaro il perché.
L’immagine qui sopra vi riporta il titolo di un recente articolo del Financial Times, che noi qui di seguito abbiamo scelto di riprodurre: l’articolo spiega perché il mercato finanziario più grande e più liquido al Mondo, che è il mercato per i titoli di Stato degli Stati Uniti, da mesi NON funziona più come prima. Ed in qualche occasione NON funziona del tutto.
Dopo che avrete letto l’articolo, Recce’d spiegherà le ragioni per le quali il funzionamento di questo specifico mercato ha una influenza, diretta e significativa, molto al di fuori dei confini del mercato USA dei titoli di Stato, e tocca le Borse mondiali, gli altri mercati dei Titoli di Stato, il mercato dei cambi e quello delle materie prime.
Tocca, quindi, ognuno degli asset che voi oggi avete dentro il vostro portafoglio in titoli e Fondi.
Buying and selling in the world’s biggest bond market is supposed to be easy.
However, for most of this year, says Gregory Whiteley, a bond portfolio manager at DoubleLine Capital, it has been anything but straightforward. Whiteley says a trader used to be able to get hold of $400mn of US Treasury bonds — not an outsize quantity in this $24tn market — as a routine matter. But now that typically involves breaking up the order into smaller chunks; perhaps doing $100mn of the trade electronically, he explains, and then picking up the phone to see if they can prise the rest of the debt from the hands of Wall Street’s trading desks over the course of a day.
The US Treasury bond market suffered a huge scare at the start of the coronavirus pandemic when fears about a collapse in the global economy led to a sudden slump in prices and liquidity. Now as the Federal Reserve battles to rein in inflation, a recession looms and most asset prices have faced a dramatic sell-off, the world’s most important bond market is creaking once again.
Liquidity in the market — one crucial measure of how well it is functioning — is at its worst levels since March 2020 after a dramatic decline in the past year. Market depth, a measure of liquidity which refers to the ability of a trader to buy or sell Treasuries without moving prices, is also at its worst level since March 2020, according to Jay Barry at JPMorgan. “Markets are in a much more fragile place, with terrible liquidity,” says Greg Peters, co-chief investment officer at PGIM Fixed Income. “The way I think about fragile market function is that the odds of a financial accident are just higher.”
All this was happening even before the recent meltdown in UK government debt, which has added to the anxiety about the vulnerability of the world’s large bond markets. While investors are not concerned about an exact replay of the UK crisis, in which pension funds placed leveraged bets on the direction of bonds at a large scale, many fear that an unforeseen wave of selling could quickly overwhelm the US bond market’s shaky infrastructure. “The wobble in the gilts market was a fire drill for everyone else,” says Steven Major, global head of fixed income research at HSBC. In some cases, investors say, a lack of liquidity is driving volatility in US bond prices, rather than the other way round.
Regulators have unveiled a slew of measures aimed at improving the functioning of the market. At an important annual conference on Wednesday hosted by the New York Fed, officials will discuss with industry leaders ongoing efforts to improve the market’s resilience. “My assessment is that markets are well functioning, trading volumes are large, traders are not having difficulty executing trades,” Janet Yellen, the US Treasury secretary, said at the end of October in a speech on the subject. Reforms were being developed to “improve the Treasury market’s ability to absorb shocks and disruptions, rather than to amplify them”, she said. The Securities and Exchange Commission has put forward two ambitious proposals to improve the market’s resilience, while the Treasury has been consulting on a proposal to buy back illiquid bonds. The Fed has stepped in to stabilise markets during previous crises, such as in March 2020, and ultimately it could suspend its ongoing efforts to sell down some of the securities on its balance sheet or even restart its quantitative easing programme if the situation demanded, investors believe.
But the sense of vulnerability around the US Treasury market is a matter of vital concern for investors given that everyone, from pension funds to foreign governments, puts their money in the market for safekeeping, making it the world’s de facto borrowing benchmark. Any sustained problems or a collapse in prices would have global consequences, ricocheting through stocks, corporate bonds and currencies. “It’s not simply the fact of having shit liquidity . . . it’s also what that implies for financial regulation, which is singularly premised on Treasuries being able to be sold easily,” says Yesha Yadav, a professor at Vanderbilt Law School who researches Treasury market regulation. “If you can’t guarantee that because liquidity is not working as it should be, I think that does imply something, not just about Treasury market stability, but about broader financial market stability.”
Investors acknowledge that liquidity in the Treasury bond market was bound to deteriorate this year, regardless of the mechanics of the market. Treasury yields, which move with interest rates, have been much more volatile than usual as the Fed has aggressively tightened monetary policy. Amid so much uncertainty, it was inevitable that it would be harder and more expensive to trade. And while the cost and difficulty with which investors trade in Treasuries has risen, trading volumes have remained steady through 2022, according to data from Sifma, the securities industry’s trade group. “As volatility goes up, it is only natural for the cost of transactions to go up.
Volatility has gone up significantly, as we’ve seen the Fed hike rates in 75 basis point increments at an unprecedented pace,” says Isaac Chang, head of global fixed income trading at Citadel. “Liquidity concerns need to be viewed in that context.” Increased volatility tends to lead to reduced liquidity in the market. However, for some seasoned observers of US Treasuries, the causal relationship has begun to swing in the opposite direction, where illiquidity is now driving some of the volatility. Brian Sack, the director of economics at hedge fund DE Shaw, was the vice-chair of the Treasury Borrowing Advisory Committee until August of this year. The committee makes recommendations to the Treasury about how much and what it should borrow, and in May delivered a report about liquidity issues in the market. “For much of the year we’ve seen concerns about Treasury market functioning, but for a time this appeared mostly driven by the volatility of yields arising from fundamental developments,” says Sack. “In recent months, however, liquidity in the Treasury market has deteriorated further. This recent development is more concerning, as it seems as if market functioning has become a bigger source of risk, rather than just reflecting the uncertain fundamental environment.”
For most analysts, the liquidity problems in the Treasury market are not just about rapidly changing prices, they are also a reflection of a dearth of buyers, or an inability or unwillingness of the buyers in the market to mop up all the supply. The fact the Treasury department has begun discussing the prospect of buying back some of the most illiquid Treasury bonds, says HSBC’s Major, is an implicit acknowledgment that faltering demand has begun to cause problems.
One reason for the new questions about demand has been that the Treasury market has ballooned in size in recent years and the biggest buyers of that debt, most notably the Fed and the Bank of Japan, are stepping back. The Fed has been pulling back from the Treasury market as part of its quantitative tightening programme. And the Bank of Japan — guided by the policies of the Ministry of Finance — has been selling some of its foreign bond holdings, thought to consist largely of Treasuries, to support the yen against the strong dollar. Higher rates could cause the Treasury market to expand further. “The overall Treasury market is going to grow dramatically in order to pay the interest rates,” says Chris Concannon, president of trading platform MarketAxess. “To pay the rates, you’re going to see sizeable growth just to fund the payments required.”
The retreat of major buyers in the Treasury market has also been a function of regulations introduced following the financial crisis that have made it more expensive for primary dealers — the banks that buy bonds directly from the Treasury, and have been a traditional provider of liquidity — to hold Treasuries. As primary dealers have limited their role, high-speed traders and hedge funds have taken their place to provide much-needed liquidity. These investors are less regulated and have behaved differently from how primary dealers did. Market watchers say there have been important moments of instability in the market where high-speed traders have pulled back from providing liquidity. The involvement of hedge funds and high-speed traders has also injected more leverage into the market — a factor that exacerbated the market crisis in March 2020. As panicked investors were selling Treasuries, hedge funds in leveraged bets known as the basis trade that sought to exploit small anomalies in bond prices were forced to unwind their positions, accelerating the sell-off.
Whether there are similar pools of leverage in Treasuries at present is hard to assess. Trading in Treasuries is opaque, and information about positioning, especially among non-banks, is hard to come by. The data that is available — such as that cited in the Fed’s financial stability report — is only published with a delay of several months. The latest report notes that measures of hedge fund leverage are above historical averages. “These gaps [in receiving the data] raise the risk that such firms are using leveraged positions, which could amplify adverse shocks, especially if they are financed with short-term funding,” the report said.
Amid such concern, regulators have been eager to point out that the market has not been disrupted. In spite of the high volatility and poor liquidity this year, there have been no signs of forced selling of major leveraged positions. The enormous attention focused on the market also means that any signs of problems could be picked up fairly quickly, even if transparency in Treasury market data is notoriously poor. In addition to the discussion about possible buybacks of illiquid bonds, at least one Fed governor has mentioned the possibility of easing some of the capital requirements on big banks, which would free their balance sheets to hold more Treasuries.
There have also been proposals trying to improve the functioning of the market. Indeed, the proposals put forward by the SEC could represent the biggest changes in US market regulation since the 2010 Dodd-Frank act. The two main proposals would regulate non-bank players in the Treasury market in similar ways to banks. The first, known as the dealer rule, would require any Treasury market participant trading more than $25bn a month to register as a dealer, forcing them to be more transparent about their trading and positions and increasing their capital requirements. The second proposal would require more trades to be centrally cleared, meaning more deals in the Treasury market would have to be guaranteed by a third party, and the participants in the deal would have to have more cash on hand to place the bets. The international Financial Stability Board, which makes recommendations to the G20 nations on financial rules, said in a report from October that increasing the capital cushion required of non-bank liquidity providers and encouraging central clearing could help to stabilise core markets such as Treasuries in moments of poor liquidity.
The SEC’s central clearing proposal has not provoked much backlash, but the dealer rule has. Hedge funds in particular have said that the rules are so sweeping they would affect funds that trade in the Treasury market on a regular basis to manage their risk, in addition to those placing speculative trades. What’s more, hedge funds typically have small balance sheets and borrow to make bets, and the new capital requirements would fundamentally change the business model of these firms. These changes are so significant that some hedge funds have threatened to pull out of the market entirely, which would exacerbate the liquidity problems the market is facing. “The SEC’s dealer rule imposes an unworkable regulatory structure that would cause many funds to reduce or cease their Treasury trading activity,” says Bryan Corbett, chief executive of Managed Funds Association. “The rule will lead to greater concentration, fewer market participants, and increased volatility, which is the opposite of the SEC’s stated objective.”
If that leads to reduced participation by these investors in the Treasury market, then new buyers for US government debt will need to be found, especially after the rules come into effect in the coming years. “It is possible that the real risk will only come after a year of QT [quantitative tightening] and a year of increased private absorption of Treasuries because a new set of holders will have to be found, and maybe some of those turn out to be weak hands,” says Brad Setser, a fellow at the Council on Foreign Relations and a former Treasury official under President Obama.
Ultimately, a large-scale Treasury market crisis would likely lead to an intervention by the Fed — just as in the UK, the Bank of England temporarily halted its quantitative tightening programme to backstop the market. However, a market in which the Fed is regularly forced to intervene is also not one that communicates the kind of stability and security that investors around the world depend on. “If there were to be the kind of disruption that we’ve seen in the gilts market in the Treasury market, there would be a bigger global impact just because the Treasury market is so much more important globally,” says Setser.
Abbiamo lasciato intenzionalmente nella lingua originale, ma a voi non sarà sfuggito che i punti di maggiore rilevanza sono quattro:
negli ultimi mesi è la scarsa liquidità ad avere alimentato la volatilità, anziché il contrario (come accadeva in precedenza);
la crescita della dimensione dei mercato dei Titoli di Stato provocata dall’aumento degli interessi pagati sui titoli emessi
la leva finanziaria che pesa su questo mercato (dati che nessuno conosce nel dettaglio)
le possibile ricadute su altri comparti: azioni, valute eccetera
Nel dettaglio, ognuno di questi quattro punti da noi è stato analizzato già in più occasioni, soprattutto nel quotidiano The Morning Brief, ma pure qui nel Blog (con le ovvie limitazioni dovute alla limitazione dell spazio).
Ritornando a ciò che si diceva in apertura, il tema della liquidità oggi è determinante, per chi investe in modo consapevole: un buon gestore di portafoglio ed un buon gestore oggi devono avere coscienza che il tanto parlare dei “rialzi dei tassi uffciali” è tempo buttato via (nella logica della gestione dei portafogli titoli), mentre occorre analizzare bene, e subito, quali saranno le reazioni dei mercati finanziari alla massiccia riduzione della liquidità (in generale e non solo nel mercato dei Treasuries) alla quale tutte le Bnache Centrali saranno costrette a ricorrere nel 2023.
Perché scriviamo “costrette”? Perché le Banche Centrali saranno costrette a riportare l’inflazione sotto controllo, dalla pressione sociale e politica, e NON è possibile negli anni del post-QE limitare l’inflazione solo alzando i tassi di interesse.
Sarà necessario ridurre la liquidità: e questo lavoro NON è ancora iniziato.
Trovate qui sotto un secondo articolo, che con maggiore chiarezza illustra le ragioni per le quali uno dei tre temi decisivi per la gestione del portafoglio titoli del 2023 sarà “la massiccia riduzione della liquidità in circolazione.
While many market participants are concerned about rate increases, they appear to be ignoring the largest risk: the potential for a massive liquidity drain in 2023.
Even though December is almost here, central banks’ balance sheets have hardly, if at all, decreased. Rather than real sales, a weaker currency and the price of the accumulated bonds account for the majority of the fall in the balance sheets of the major central banks.
In the context of governments deficits that are hardly declining and, in some cases, increasing, investors must take into account the danger of a significant reduction in the balance sheets of central banks. Both the quantitative tightening of central banks and the refinancing of government deficits, albeit at higher costs, will drain liquidity from the markets. This inevitably causes the global liquidity spectrum to contract far more than the headline amount.
Liquidity drains have a dividing effect in the same way that liquidity injections have an obvious multiplier effect in the transmission mechanism of monetary policy. A central bank’s balance sheet increased by one unit of currency in assets multiplies at least five times in the transmission mechanism. Do the calculations now on the way out, but keep in mind that government expenditure will be financed.
Our tendency is to take liquidity for granted. Due to the FOMO (fear of missing out) mentality, investors have increased their risk and added illiquid assets over the years of monetary expansion. In periods of monetary excess, multiple expansion and rising valuations are the norm.
Since we could always count on rising liquidity, when asset prices corrected over the past two decades, the best course of action was to “buy the dip” and double down. This was because central banks would keep growing their balance sheets and adding liquidity, saving us from almost any bad investment decision, and inflation would stay low.
Twenty years of a dangerous bet: monetary expansion without inflation. How do we handle a situation where central banks must cut at least $5 trillion off their balance sheets? Do not believe I am exaggerating; the $20 trillion bubble generated since 2008 cannot be solved with $5 trillion. A tightening of $5 trillion in US dollars is mild, even dovish. To return to pre-2020 levels, the Fed would need to decrease its balance sheet by that much on its own.
Keep in mind that the central banks of developed economies need to tighten monetary policy by $5 trillion, which is added to over $2.50 trillion in public deficit financing in the same countries.
The effects of contraction are difficult to forecast because traders for at least two generations have only experienced expansionary policies, but they are undoubtedly unpleasant. Liquidity is dwindling already in the riskiest sectors of the economy, from high yield to crypto assets. By 2023, when the tightening truly begins, it will probably have reached the supposedly safer assets.
In a recent interview, Bundesbank President Joachim Nagel said that the ECB will begin to reduce its balance sheet in 2023 and added that “a recession may be insufficient to get inflation back on target.” This suggests that the “anti-fragmentation tool” currently in use to mask risk in periphery bonds may begin to lose its placebo impact on sovereign assets. Additionally, the cost of equity and weighted average cost of capital increases as soon as sovereign bond spreads begin to rise.
Capital can only be made or destroyed; it never remains constant. And if central banks are to effectively fight inflation, capital destruction is unavoidable.
The prevalent bullish claim is that because central banks have learned from 2008, they will not dare to allow the market to crash. Although a correct analysis, it is not enough to justify market multiples. The fact that governments continue to finance themselves, which they will, is ultimately what counts to central banks. The crowding out effect of government spending over private sector credit access has never been a major concern for a central bank. Keep in mind that I am only estimating a $5 trillion unwind, which is quite generous given the excess produced between 2008 and 2021 and the magnitude of the balance sheet increase in 2020–21.
Central banks are also aware of the worst-case scenario, which is elevated inflation and a recession that could have a prolonged impact on citizens, with rising discontent and generalized impoverishment. They know they cannot keep inflation high just to satisfy market expectations of rising valuations. The same central banks that assert that the wealth effect multiplies positively are aware of the disastrous consequences of ignoring inflation. Back to the 1970s.
The “energy excuse” in inflation estimates will likely evaporate, and that will be the key test for central banks. The “supply chain excuse” has disappeared, the “temporary excuse” has gotten stale, and the “energy excuse” has lost some of its credibility since June. The unattractive reality of rising core and super-core inflation has been exposed by the recent commodity slump.
Central banks cannot accept sustained inflation because it means they would have failed in their mandate. Few can accurately foresee how quantitative tightening will affect asset prices and credit availability, even though it is necessary. What we know is that quantitative tightening, with a minimal decrease in central bank balance sheets, is expected to compress multiples and valuations of risky assets more than it has thus far. Given that capital destruction appears to be only getting started, the dividing effect is probably more than anticipated. And the real economy is always impacted by capital destruction.