naked capitalism

Stuart says:

Somewhere, somebody is in Europe is smiling in amusement tonight as we give our briefs a try on for size. Sadly, I fear those smiles will escalate into outright laughter (schadenfreude) soon enough.

Sign of the times: Caveat Emptor

Henri Tournyol du Clos says:

Misrepresentations indeed.

Yves, I fear you are mixing up the way a bond market

a) is sometimes officially supposed to be organized (childish knock-for-knock market-making rules for small sizes, which are usually a nuisance dating back to the market’s infancy and are kept on only at the insistence of one or two large houses, which like their manipulative powers, and all the insignificant ones, which otherwise would not see any business);

b)and how the market really works (real transactions between consenting, adult banks).

In the Pfandbrief market, the knock-for-knock system is still officially in place because of Germany’s failure to simplify its overly numerous, over-complicated and over-regulated banking system – a long overdue task it cannot achieve thanks to its consensus-based Federal structure and which it has effectively delegated to outside banking crises, like that subprime thing we’ve been in for a year.

A knock-for-knock market-making suspension is as relevant to real market liquidity as the raising of a “No swimming” flag on a beach is to the state of international shipping lines.

Henri Tournyol du Clos says:

Yves,

1 – a lot of that “market” is artificial because of too many would-be market participants and their wearing the wrong hat : most German market-makers are in fact primarily issuers or/and holders of the said bonds, not dealers;

2 – “because the FT said it” is NOT a valid argument : on fixed income markets, people that actually talk to newspapers are usually those that know least about the subject and have the time to do so. The others are either busy or anxious not to let out anything that might jeopardize the recycling of what is in their book. In the unlikely event that someone knowledgeable accidentally picks up the phone and gets interviewed, you can anyway usually rely on journalists to misunderstand it or mess it up…

Ginger Yellow says:

It’s also worth remembering that in November banks were still making markets for clients, just not for other market makers.

Henri Tournyol du Clos says:

“Yves Smith said… Henri, People can and do call the press and demand retractions if they are misquoted. “

On general market commentaries? In what Wikipedia-like fantasy world do you live? Fixed income market professionals don’t even bother with answering phone calls from journalists for a start, since the opportunity cost might be just too expensive. And you want them to 1 – read the uninformed commentaries in the actual paper the next morning and 2 – call back the journalist and try to explain to her/him again what she/him misunderstood?

Journalists are only picked up by eager trainees, blabbering middle managers whose job it is to let nothing of importance out or bored traders from third rate institutions.

You seem to have no understanding whatsoever of how a fixed income market works – a liquid market in illiquid products. As usual with markets and other human ventures, 80% of market volume will be seen by 20% of market participants – most of which will then be perfectly fit for delivering a perfectly inept commentary. The other 20% will keep mum, because, again, what they might say can harm their book.

Now, to come back to your initial comment : liquidity – ie REAL liquidity – evaporated from ALL bond markets at the end of last year, as it usually does at year end, but probably to a level unseen since the darkest days of 1998 from what I hear. It did so too on the covered bond market. It has nothing to do with covered bonds themselves – although there is a real problem with some of them having been issued by institutions, often German state-sponsored, with little economic purpose. But this has NOTHING to do with the silly “official market-making rules”.

Oh, and also, the only reason I have time to comment is that I am retired (and thus cannot know exactly from first hand experience about what may be really have been happening on the markets last November).

Ginger Yellow says:

“Ginger Yellow, multiple markets were hit by illiquidity in November and December of last year. That was the impetus for the creation of the TAF, which at the time was seen as a radical measure.”

Of course. My point was that covered bonds remained among the most liquid markets around at the time (still not very liquid), and far more liquid than European mortgage backed securities. A look at the bid/offer spreads available then would tell you that. Even at the height of the liquidity scare in November/December, a few issuers temporarily postponed deals, only to issue them a few weeks or a month later. It doesn’t even bear comparison with the ABS market.

I’m not saying that the covered bond market is impervious to liquidity crises, but banks have to fund somewhere, and covered bonds have proven more reliable and cost effective than pretty much any other wholesale funding source.