Investment banking revenue has been supported by high trading volumes in the fixed-income market in recent quarters, even as bond prices have fallen. But the quality of these markets has varied alarmingly.
At the worst time in June, debt capital market bankers blamed the collapse in new issue volumes on bond funds suffering outflows and portfolio managers simply not raising cash – even for new issues at attractive prices – if this required selling assets from their portfolios.
In an environment of rising rates and widening credit spreads, the bid-ask spreads in the secondary market were too wide and the risks too high to execute a large block without pushing prices even lower.
Secondary markets and primary markets both stagnated.
Liquidity in a liquidation is a problem that bond market participants have had more than a decade to prepare for. As the rate crackdown and low credit spreads made debt almost free for high-quality issuers, bond stocks swelled far beyond the capital capacity of trading desks from banks to intermediary.
Now, even as rates markets stabilize — because bond investors believe the coming recession will slow the central bank’s aggressive pace of rate hikes to contain inflation — worries continue to mount over credit markets.