Credit Cards Tips for You

LONDON: The credit markets can expect to see liquidity fall and volatility rise more than is usual this year-end as banks and investors pull in their horns to preserve fat profits from the corporate bond rally that began in March.

Banks, battered by the crisis, will particularly step back from taking big positions as they try to shrink balance sheets to bolster capital ratios ahead of their financial year-ends in December, analysts said.

“All these factors imply for us that market liquidity probably won’t be great,” said Hans Lorenzen, credit strategist at Citi.

“Real money investors have lots of cash, but if they remain a little cautious near-term, then it is not easy to see who is going to be taking the other side if banks and other investors want to reduce exposure into the year-end,” said Lorenzen, who remains bullish on the credit market outlook going into 2010.

The end of 2009 looks much less scary in terms of liquidity than the end of 2008, when central banks and governments were battling to prevent a global financial meltdown.

“Most trading books will be sitting on a very nice profit, so we would expect even thinner liquidity in December as people try to focus on wealth preservation and bonus preservation – dare I say it,” said Phil Milburn, fixed income fund manager at asset manager Aegon.

Investors and investment banks will try to tread water as much as possible.

LOW RISK TO NO RISK
Asset manager Credaris’s credit fund currently aims to balance its portfolio to achieve a largely flat exposure to any directional move in spreads at this point.

Sam Cowan, Credaris senior portfolio manager, said as the end of the year approaches people’s risk tolerance goes from historically low to no risk.

“Nobody is going to risk anything for that one little bit of upside,” Cowan said.

Traders and investors will want to lock-in some profits, but won’t want to put too much into actual cash because there are expectations of credit markets moving tighter still.

“Most investors are expecting further tightening in credit markets so you don’t want to reduce your exposure too much,” said Jeroen van den Broek, credit strategist at ING.

But if there is profit-taking and if the secondary market is illiquid this could mean unusual price moves, he said.

“It will be a position-driven market heading into the year-end, so you might see some anomalies as positions get turned,” van den Broek said.

Another factor that could impact liquidity is that the U.S. investment banks Morgan Stanley and Goldman Sachs have joined most other banks in ending their financial year in December rather than November.

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