Some interesting insights by Citi’s Matt King recapping last week’s Citigroup credit conference.
… [D]espite one panellist’s suggestion that “perhaps corporate bonds were never meant to be a liquid asset class in the first place”, and universal admissions that when you buy a bond these days you have to be prepared to hold it, there were other signs that at least some degree of secondary trading remains alive and well. The well attended sessions held by both our IG and HY analysts are not merely a sign that investors are paranoid about stepping on the next corporate landmine; it also suggests investors’ desire for alpha from traditional single-name trading is as keen as ever.
Interest in other ways to pick up yield was not quite as intense, to judge from attendance at the structured credit stream. Perhaps people are just frustrated that the ECB is hoovering up all the interesting ABS – or maybe on the synthetic side they perceive that, given the annual doubling in option volumes – all the opportunities have been exploited already…
… [I]t is hard to think that concerns about defaults in the US HY energy sector will go away any time soon – even if we think that some of the statistics we have heard being bandied about lately (“40% defaults in two years with oil at $65”) pay insufficient respect to companies’ ability to rein in capex and other expenses. On the political front, Tina Fordham raised the question as to whether markets are overestimating the ability of liquidity to override the secular shift in geopolitical risk, given the way nationalism is increasingly being used as a tool to counter growing resentment at rising inequality.
… it is probably fitting that the conference ended, as it began, with secular stagnation. Greenspan was perhaps more tactful in his criticism of today’s central bank policies than we might have expected (reserving his ire for the intractable heft of Dodd-Frank, saying he “couldn’t even lift” its 2300 pages). But his musings on the futility of QE (“You mean, if the first $3 trillion didn’t have any effect, do I think we should add another?”), and on the way the accumulated stock of debt is creating so much uncertainty that it is holding back capex, both accord very much with the way in which we see the world – and yet are at odds with today’s central bank orthodoxy.
… It is hard to sum up a conference featuring fifty-eight different sessions spread across eight different streams: everyone’s impressions will inevitably be personal. Ours, though, is that investors remain united in their faith in the central banks – if not for their ability to create growth, then at least in their ability to push up asset prices. And yet the limits of that faith are increasingly on display. Not only are there signs of trouble at individual corporates on the ground. There is also a growing realization that the central bankers themselves – be it the ECB today, or the past and present Chairs of the Fed – subscribe to different theologies.
For now and for next year, we think the grip of the Inner Party seems firm, and (provided they are prepared to wield it) liquidity will keep pushing up prices. But whereas Orwell’s processes of Learning and Understanding led inevitably to an ending involving Acceptance and Reintegration, the real world’s liquidity addiction feels to us merely like the end of a chapter.
