We have had the the discussion for while on the adverse effect from Fed policy on the supply and liquidity of fixed income securities. This is relevant both in terms of the outright supply of assets in terms of portfolio composition needs as well as the use of such assets as collateral.
This is a theme Variant Perception has covered in detail this year and in a recent blog, we look at the increasingly disappearing liquidity from corporate bond markets.
One of the themes that we have been highlighting this year is the growing bubble in corporate bonds. It is pointless in the first instance to discuss whether super easy monetary policy that has fueled this bubble is appropriate or not. The main thing for investors to countenance is that the current monetary policy regime is having unintended consequences through the formation of a bubble in increasingly scarce liquid fixed income instruments.
In May, when we put out our report on corporate bonds, we described what we saw as the seeds of the next global crisis. In particular we emphasized the fact that there are now more corporate bonds outstanding in the US than there are mortgage-backed securities. That chart remains a key chart five months hence.