A new study from Greenwich Associates revealed last Thursday that the liquidity crunch in global credit markets sparked by the collapse of the U.S. sub-prime mortgage sector severely disrupted the trading and usage of many fixed income products. Institutional investors fear that fallout will continue to spread.
Greenwich Associates surveyed 251 institutional investors in North America, Europe and Asia about the extent and ramifications of the liquidity crisis that began in the U.S. sub-prime sector this summer. The asset management firms, banks, hedge funds and other institutions participating in the study report that trading in various credit-related products and asset classes has broken down entirely at certain times since the outbreak of the crisis. In addition, a large majority of plan sponsors report that recent market developments have shaken their confidence in credit rating agencies.
Among survey participants active in asset-backed securities (ABS) and collateralised debt obligations (CDOs), more than 80% say they have experienced difficulty in obtaining a price quote from their fixed-income dealers on these products since the outbreak of the market turmoil. Almost 80% of the collateralied loan obligation (CLO) users responding to the survey and nearly 70% of leveraged loan investors say they have had trouble getting a dealer quote on the products, as did nearly 65% of survey participants active in mortgage-backed securities (MBS) and more than 60% of commercial mortgage-backed securities (CMBS) investors.
“In perhaps the clearest indication of the severity and extent of the liquidity disruption, more than 60% of participants active in corporate bonds say they have experienced trouble getting a simple price quote from dealers on these usually liquid products,” says Tim Sangston, consultant, Greenwich Associate.
More than three-quarters of the institutional investors responding to the Greenwich Associates survey believe that the liquidity crisis will continue to spread into products and markets beyond mortgages, collateralised debt obligations and other structured products. “However, the investors are divided when it comes to the question of whether the current liquidity crunch represents a short-term event or a structural crisis,” says
Lori Crosley, consultant, Greenwich Associates. “Fifty-five percent of study participants see the liquidity crunch as a structural crisis, while 45% see it as a short-term event.”
“Institutions are focussed on limiting counterparty-risk in an atmosphere in which the full extent of the losses and exposures of individual counterparties can be difficult if not impossible to ascertain,” says Karan Sampson, hedge fund specialist, Greenwich Associates.
Nearly a third of the institutional investors participating in the study say they are liquidating positions and portfolios in order to mitigate the risks posed by turbulent credit markets and roughly half say the recent performance of CDOs and other structured products has made them less likely to invest in these products in the future. “A sizeable share of participants say they have stopped investing in fixed income altogether for the time being,” says Frank Feenstra, consultant, Greenwich Associates. “It is hardly an exaggeration to call this a total market breakdown,” adds Sangston.