If there’s anything the 2008 financial crisis taught everyone, it would be that putting everything on credit is a bad, bad thing and quick money isn’t the answer to most corporate problems. While it may press on the inevitable fact that some businesses must be shunned and sacrificed, everyone wants to survive.
Therefore, a repeat of 2008 could happen because of the Corporate Bond Market.
Banks Cut Off Their Bonds
Over time the UK’s corporate bond growth had seen a 75 per cent reduction to bond inventories of banks, which are the primary dealers, since 2008. Meanwhile, the market had grown in size the past 10 years due to affordable offers due to low interest rates the Bank of England offered previously.
A combination of new rules on buying and selling bonds left banks with reduced inventories, making it difficult to liquidate. This can introduce large pricing swings in the market, which might begin a collapse.
Bad Interest Rate Rise
The Bank of England is signalling it would increase interest rates by the following year. Analysts are spooked as investors, who so quickly purchased corporate debts and bonds for cheap interest rates, might pull out as they put in.
Unless banks increase their capital, this couldn’t happen. However, due to increasing UK bank levies and stricter laws, banks such as HSBC intend to move their global headquarters out of the UK, bringing with it a huge amount of their debt.
No One Knows How It Would Work
If such pull out does happen, analysts are afraid of several complex issues.
According to Citi’s Credit Strategist Matt King:
“There is concern about bank regulation putting dealers under pressure. Most of the evidence shows dealers have become more efficient.”
King points out that investors pulling out could mean credit mutual funds losing much of their cash once savers withdraw money as soon as the rates rise.
Central banks backing banks use economic assumptions to work out the valuations in their mortgages. Corporate bonds are difficult to track because the companies can default in unpredictable ways.