| Analysis: Pockets of debt illiquidity show rising bank fears Thursday, 01 September 2011 00:00  Pockets of the fixed income and money markets are starting to reflect concern that recent volatility will extend past August, and that growing risk aversion may again roil banks and funding markets.One sign of worry is the increasing reluctance of banks to use their balance sheets to facilitate trades, which has hit sectors from corporate bonds to the short-term repurchase market, where there is $1.6 trillion in triparty loans. For example, banks have reduced activity in the intra-dealer Treasury repurchase agreement market by 63 percent since the end of June, according to Barclays Capital. To some, this spreading risk aversion suggests that an autumn of troubling headlines could again spark a freeze like the 2008 crisis. There is no shortage of potential flash points, from Europe's debt crisis to a weak economy. "I think the markets are going to get very stressed," said Abdullah Karatash, head of fixed income credit trading at Natixis in New York. "All this uncertainty could just lead to a big leg lower in stocks and when that happens bank financial stocks are going to lead the way lower," he said. "It's gonna hurt their balance sheet and that's going to further hurt the liquidity picture." Large money funds have been pulling back on making unsecured loans to European banks, and instead moving to secured transactions. This has left the banks scrambling for dollar-based funding and, in one rare case, led a bank to tap a liquidity line at the European Central Bank. Three-month interbank dollar lending rates also rose again on Tuesday to their highest in over a year. In some recent cases illiquidity in the corporate debt market has also led investors to credit default swaps for protection as selling the bonds was too costly. CREDIT PULLBACK Volatility, if it persists, may again threaten bank funding, which is highly vulnerable to investor confidence..... |
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