dChan
Anonymous ID: acf5c1 March 9, 2020, 11:48 a.m. No.8359132   🗄️.is 🔗kun

>>8358557 pb Fed ramps up REPO amounts

 

"There Is No Liquidity" - Market Paralyzed As FRA/OIS Explodes

 

Over the weekend, we discussed the latest analysis by JPMorgan's Nick Panigirtzoglou according to which in addition to the literal lock up in equity markets (where S&P futures were halted limit down for hours overnight), the credit and funding markets were starting to show signs of extreme stress, not only as a result of the sudden plunge in energy credits but due to a return in what appears to be systemic issues within the interbank funding market.

 

As the JPM quant summarized, "we see initial signs of emerging credit and funding stress. If these shifts in credit and funding markets are sustained over the coming weeks and months, especially in the issuance space, credit channels might start amplifying the economic fallout from the COVID-19 crisis."

 

To prove his point that the credit bubble was cracking, Panigirtzoglou highlighted the recent spike in the dollar fx basis, the latest burst of repo activity by the Fed, the spike in the SOFR rate and the SOFR-IOER spread, and last but perhaps most notably, the sudden blow out in the notorious FRA/OIS spread. Fast forward 24 hours, when the cross-asset risk off cascade has been unleashed to levels not seen since the crisis , and the indicators of credit stress, had spread to the equity (and CDS) markets, resulting in a sudden collapse in liquidity, which as we pointed out last weekend was already record low (see "Two More Problems For The Bulls: Market Liquidity And Short Interest Are At All Time Lows")…

 

… and which has made navigating the market rout even more difficult, as there are large interval of time when even if securities are not locked limit down (or limit up in the case of the 10Y future), there is simply no market depth, i.e. liquidity.

 

Picking up on this, Bloomberg today writes that investors say it is becoming "increasingly difficult to trade due to the extent of swings on a day that saw 30-year Treasury yields drop the most since the 1980s and a fall in U.S. stocks so sharp that trading was halted minutes from the open" which has resulted in the biggest drop in financial conditions, i.e., market confidence and "lubrication" since since the 2008 crisis."

 

"I have yet to find liquidity," Nomura money manager Richard Hodges - whose bets on Italian and Portuguese bonds last year put him in the top 1% of money managers - told Bloomberg. "There is none."

 

To be sure, the plunge in liquidity is not just in equities, but has been observed across rates, credit and even VIX: earlier today a CBOE staffer said the VIX initially couldn't open due to an "absence of liquidity from market makers"

 

CBOE SENIOR TRADING DESK SPECIALIST: WE WERE INITIALLY UNABLE TO OPEN VIX OPTIONS TRADING THIS MORNING DUE TO ABSENCE OF LIQUIDITY FROM MARKET MAKERS

 

On Monday, one day after our credit lock up warning, Bloomberg picked up on the signals we highlighted and warned that "the key gauge of banking-sector risk" known as the FRA/OIS spread (one which we have discussed extensively in the past), soared to its highest level since 2011…… while dollar swap spreads - which we also touched upon over the weekend…… widened, suggesting stresses in U.S. markets are becoming increasingly severe.

The modest boost however will not be nearly enough, and as Morgan Stanley said on Sunday night, the only thing that can push the market out of its funk is even more QE (which of course, is also a temporary solution, as it is doing more of the same that no longer works).

 

Only even that's not true: there was a period of over an hour on Sunday night when the Ultra bond future was trading offerless, and not a single trade was possible in a market in which nobody wanted to sell what was deemed as the last safe asset.

 

Going back to the sudden evaporation of liquidity, Bloomberg notes that alongside the surge in FRA/OIS, a significant reason for the lack of depth in bond markets is the emergence in stress indicators of uncertainty about what the Fed will do next. One example is the fluctuations in liquidity in the financial system.

The end result is a near record surge in volatility.

The Bank of America Merrill Lynch MOVE Index, which measures price swings in Treasuries, jumped to the highest level since 2009 Monday.

https://www.zerohedge.com/markets/there-no-liquidity-market-paralyzed-fraois-explodes