Bonds Dry Up – Derivatives Explode

Here is an excellent article about why derivatives are exploding.

nuclear

https://marketwatch.creatavist.com/story/7571

Here is a summary of that article.

The Volcker Rule was passed as part of the Dodd-Frank financial reform bill in 2010. It banned banks from trading securities with their own money, or proprietary trading. Nonetheless, banks had already wound down their proprietary trading operations in anticipation of the rule taking effect…

For larger investors, another trick to circumvent liquidity issues is to deal in more liquid synthetic securities such as derivatives contracts, which can be used to bet on the credit quality of a company without having to deal with the same liquidity problems of the bond market.

Douglas Peebles, chief investment officer and head of AllianceBernstein fixed income, says he finds himself using more derivatives. These allow buyers to invest in the same underlying assets, but in many cases, they can be assured of more liquidity that the actual bond. Bond guru Bill Gross, who runs the world’s biggest bond fund, also concedes that he has begun using derivatives in his Pimco Total Return Fund.

Here is another article.

http://www.marketwatch.com/story/4-reasons-why-the-bond-market-is-going-wild-2015-05-12

The reasons are “four Feds”, less yield for more risk, lack of liquidity, and fear of a bubble.

For more on derivatives and tranches see this article.

https://michaelekelley.com/2015/01/28/remember-cdos-theyre-baaaack/

 Good luck!

Advertisements

Central Bank of Central Banks Warns Of Crash

The Bank for International Settlements, BIS, warns that silence is NOT golden.

golden-gun-hd-wallpapers

The BIS has been warning for years of the dangers of very low interest rates.

“A common mistake is to take unusually low volatility and risk spreads [aka silence] as a sign of low risk when, in fact, they are a sign of high risk-taking,” said Claudio Borio, head of the monetary and economic department at the BIS.

Borio added that the last time uncertainty was this low was in 2007 just before one of the largest forecast errors the economics profession has ever made [aka Great Recession].

Now the BIS has warned the world again.  This time with specifics.

The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said.

See the following link for more information.

http://www.marketwatch.com/story/low-volatility-is-a-sign-of-high-risk-taking-bis-official-says-2014-09-14?siteid=nwham

Does the BIS have to get out its big guns to make its point?