NEW YORK — A bottleneck is building in the global market for bonds.
Main Street investors have poured a trillion dollars into bonds since the financial crisis, and helped send prices soaring. As fund managers and regulators fret about an inevitable sell-off, the bigger fear is that when people go to unload, there won’t be anyone to buy.
Too many funds own the same bonds, making them difficult to sell in a sudden downturn. On top of that, the banks that used to bring bond buyers and sellers together have pulled back from the role. Investors looking to sell would be slow to find buyers, spreading fear through the $100 trillion global bond market and sending prices tumbling.
It’s a situation known as “liquidity risk,” and some bond pros are scrambling to prepare for it.
Portfolio managers are hoarding cash. BlackRock, the world’s largest fund manager, is suggesting regulators consider new fees for investors pulling out of funds. Apollo Management, famed for profiting from a bond collapse 25 years ago, is launching a fund to bet against bonds.
Mohamed El-Erian, former CEO of bond fund giant Pimco, thinks ordinary investors are too blasé about the flaws in the trading system. Investors today are like homeowners who discover there’s a clog under the sink only when it’s too late and they’re staring at a mess.
“It’s only when you try to put a lot of things through the pipes that you realize” you’ve got a problem, says El-Erian, now chief economic adviser to global insurer Allianz.
What’s at risk is more than money in retirement accounts. Big investors often borrow when buying bonds, and so losses can be magnified.
In such a fragile situation, even news with no bearing on bond fundamentals can trigger losses. After Pimco star manager Bill Gross announced Sept. 26 that he was quitting, some bonds fell sharply as investors pulled out of the company’s funds and forced their managers to sell into an illiquid market, says Guy LeBas, chief bond strategist at Janney Montgomery Scott. An index tracking “junk” bonds issued by risky companies dropped 0.74 percent in two trading days, a big move.
Since the financial crisis, the Federal Reserve’s efforts to hold down borrowing costs for businesses and consumers have pushed interest payments on many bonds to record lows. That’s set off a rush by investors into riskier ones offering higher payments. The buying has pushed up prices and added to the risk. Since the start of 2009, funds invested in junk bonds have returned an average 14 percent each year and municipal bond funds 6 percent, according to the Investment Company Institute, double their averages in the prior six years.
