The June 2015 Federal Reserve Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS) has been released. This is the second part of a two-part post.
The most interesting part of the SCOOS report is always the special questions. This survey took a look at fixed-income liquidity.
Here are some highlights:
- 80% said liquidity and market functioning for Treasuries in the secondary market had worsened relative to Q2: 2010, with 1/3 saying conditions had “deteriorated considerably”.
- 50% said secondary markets for RMBS had gotten worse.
- 40% said secondary markets for corporate bonds had deteriorated.
What is the culprit? No surprises there.
“…With respect to the most important reasons for the change, respondents reporting a deterioration in liquidity conditions primarily cited decreased willingness on the part of dealers to employ balance sheet resources for market-making purposes as a result of regulatory changes. The next most cited reason attributed the deterioration to decreased willingness on the part of the dealers to employ balance sheet resources for market-making purposes as a result of changes in internal risk-management practices or higher internal treasury charges. Other less frequently cited reasons were the increasingly automated nature of trading, increased presence of nondealer firms as liquidity providers, and changes in demand for intermediation by clients…”
It was interesting that the report noted higher internal treasury charges as a reason for reduced liquidity. That is a new one. Are banks enforcing that businesses make enough return on their balance sheet by creating hurdles in the form of internal charges? Are Treasury Departments the new profit police?
What kinds of metrics did respondents cite as evidence of their opinions? For Treasuries:
“…reduced trading volume and turnover (defined as trading volume divided by debt outstanding) were the most frequently cited by survey respondents. Also featured in responses were wider bid-asked spread as well as reductions in measures of depth in the central limit order book or greater price impact of trades. A few dealers pointed to increased volatility at month-end and around market events as indicative of deteriorating liquidity…”
For Corporates and RMBS the metrics cited were largely parallel to Treasuries.
We noticed that none of the answers had anything to do with zero interest rates, deleveraging, collateral shortages due to liquidity rules (like LCR) or increased demand for derivatives margin, client investing behavior, falling Treasury supply or ballooning corporate issuance. The reasons cited for falling liquidity seem to be systemic changes with their roots in the banks’ response to regulatory pressures. None of those are going away anytime soon.