PRESSEMITTEILUNG | In a scenario reminiscent of the credit crisis, global bond markets may collapse if the Federal Reserve is too aggressive with rate hikes, cautions Saxo.
01/08/16 | Investors should pay attention to the signs of danger looming on the horizon. The risk of a global meltdown in corporate bonds is not high but it is present, according to Simon Fasdal, Head of Fixed Income at Saxo Bank.
“The rate hikes from the Federal Reserve are set to play a crucial role. Yellen will base the rate policy on economic data and this laissez-faire approach presents a muddier picture for investors to interpret. If the rate hikes are more aggressive than expected, it could lead to a major sell-off in corporate bonds as investors demand higher returns.”
Another dangerous portent is liquidity in the bond markets which is now alarmingly low. The situation could end up being 2008 all-over again where credit markets collapsed prior to the financial crisis.
“Liquidity is at the lowest level in a very long time. This is mainly caused by the tighter regulations imposed on banks and financial institutions. A lot of players have scaled down bond-trading operations. One example is Credit Suisse withdrawing as a primary dealer in European government bonds.”
“As a result of financial institutions reducing their balance sheets and bond-trading we lose the air-bag. If we see turmoil as a result of the rate hikes the price falls will be larger than usual since there are simply no buyers in the market.” Illiquidity remains an ongoing issue for a bond market that has grown significantly in volume in the past years. The U.S. bond market is among the biggest in the world and has grown in size from $24 trillion in 2014 to $39.5 trillion at mid-2015.
“Extremely cheap interest rates have caused an explosive rise in corporate bond issuance. The buy-side primarily consists of hedge funds and mutual funds which make bond ownership more concentrated than ever before. You could even say that the current market is too symmetrical, and perhaps therefore slightly vulnerable and fragile.”
Fasdal added: “We advise investors to be cautious when trading ETFs and other financial products, especially if the underlying assets are positioned to high-yield bonds. Market turmoil could result in more funds shutting down like we recently saw with Third Avenue Management.”
About Saxo Bank
The Saxo Bank Group (Saxo) is an online multi-asset trading and investment specialist, offering a complete set of trading and investment technologies, tools and strategies.
A fully licensed and regulated bank, Saxo enables private and institutional clients to easily trade multiple assets from a single margin account on multiple devices seamlessly.
Saxo’s award winning trading technology platforms are available in more than 20 languages and form the technology backbone of more than 100 financial institutions worldwide.
Saxo also offers traditional banking services through Saxo Privatbank in select markets. Founded in 1992 and headquartered in Copenhagen, Saxo employs 1500 people in 25 offices across the five continents.
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