Portugal’s banking woes are just a ‘glimpse’ of future credit market troubles Alright, everyone: Look around you and make sure your buddies are all right. Everybody safe? Good — We have survived the first European banking troubles of the year.
While some tremors are reverberating Friday morning, the global implications of what happened in Portugal are largely fading. Most market strategists seem to believe at this point that any issues with the conglomerate that owns Portugal’s biggest bank, Banco Espírito Santo, will remain contained.
In the U.S., stocks are in the green and Portuguese equities, as measured by the benchmark PSI 20 PT:PSI20 +1.83% , are recovering.
That may provide a sigh of relief for investors, who can get back to the business of pondering this low-volume and low-volatility market. But here’s a lesson, courtesy of Deutsche Bank strategists, led by Jim Reid and Anthony Ip: The Portuguese events gave a small preview of what could happen when the credit market turns:
“Whatever one feels about financials and the wider financial system, credit markets did arguably get a small glimpse of what things will be like when this cycle does actually end as the structurally impaired liquidity that exists in credit caused a small amount of panic yesterday morning before markets recovered in the European afternoon session. Liquidity is really poor in credit these days which doesn’t matter when markets are in buy only mode as they have been for many quarters now, but it does matter on the days when you get a negative story. So when the big story/event comes credit could be in a fair bit of trouble but I suspect this isn’t it.”
In other words: investors have been piling into the corporate bond markets for years as they search for higher yields in a low-rate environment. Meanwhile, it’s become tougher to trade those bonds because investment banks are reducing their capacity to intermediate between buyers and sellers of debt. That means negative events (like Portuguese banking troubles) that might cause investors to flee the riskier parts of the fixed-income markets can turn a small sell-off into a large one. That’s caused some market participants to warn that the credit markets are getting overheated and there’s a looming fear that one large event could trigger the reversal.
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link to blogs.marketwatch.com]
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