The precipitous fall in banks’ FICC revenues last year caused the secondary bond market to dry up. This could mean less corporate debt underwriting and tighter secondary market support.
FICC, or Fixed Income Clearing Corporation, revenues fell on average 20 percent in 2013. Analysts now say that the first quarter could be even worse. Morgan Stanley and Credit Suisse estimate that total FICC revenues will be down 40 percent year over year, according to the Financial Times.
The big dealers’ combined bond inventories fell from a peak of $235 billion in 2007 to $37 billion at the end of last year. They could fall further if banks’ bond inventories decline in price and banks find themselves selling into an illiquid market.
This would have two main consequences for treasury. First, fewer dealers willing to hold inventory means more difficulty getting debt underwritten and less secondary market support.
Second, a lot of the inventory shed by the banks has ended up with bond mutual funds and money market funds. The amount of money in these funds has grown to $840 billion, according to IFR. There is a concern that funds that need to sell bonds to fund redemptions will have a hard time doing so since the dealers won’t use their balance sheets to fund the purchase of large amounts of bonds and stabilize the markets, as they did in the past.
That could be trouble from an issuing point of view but also in the area of cash management. Bond funds that can’t liquidate their assets to fund withdrawals may be unable to meet investor redemptions.