Will the corporate bond market seize up?

September 15, 2008

Remember how the market for asset backed  securities suddenly seized up in August last year, and evaporated?

According to traders at Loomis Sayles, a bond trading firm, corporate bond market have completely seized up, and bidders have disappeared. It was “not possible to get quotes” in many cases, there was a “complete lack of liquidity”. The same case was being made for the CDS market today.

This reminds exactly of the situation in August of last year, when securities firms and brokerages found it impossible to value their asset backed securities. If this is confirmed by developments of the next few days and weeks, the significance and seriousness of this situation cannot be overemphasised.

The expectation, until recently, that no large financial firm would be allowed to fail reminds of the conviction that securities rated AAA would never lose their value. When that conviction evaporated, the markets for those assets disappeared, bringing us to where we are right now.

If this same chain of events is repeated for CDS and corporate bonds, it will lead a doubling of the economic troubles that we’re suffering today; a rapid escalation in corporate bankruptcies would be the outcome. The next few days and weeks will be crucial.


One Response to “Will the corporate bond market seize up?”

  1. The term is “seize up.”

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