Salient to Investors:

US corporate-bond trading volume in August have fallen to the lowest since 2008 despite soaring company debt.

Exiting from fixed-income securities is getting tougher as the biggest bond dealers adapt to new capital standards by reducing inventories by 76 percent since the peak in 2007. The 21 primary dealers reduced their balance sheets to $56 billion at the end of March from $235 billion in October 2007.

The Treasury Borrowing Advisory Committee said investors are failing to find relief from waning liquidity and liquidity is about much more than turnover and tends to disappear abruptly when really needed.

Stephen Antczak at Citigroup said if everybody has the same mandate, who will take the other side of the trade?  Antczak said the unprecedented growth of funds that publish market prices of their assets daily has changed the dynamic of credit markets, with investors more inclined to redeem funds as sentiment deteriorates. Antczak et al said the concentration of credit risk in funds that take bullish positions on corporate debt is leading to more of a one-sided market than in the past. Citigroup says the funds account for more than 40 percent of the debt’s owners versus 25 percent in 2007.

Hans Mikkelsen et al at Bank of America expect outflows to accelerate.

Jeff Meli at Barclays said the dealer community buffered against those swings at one point but are not there anymore, while liquidity has deteriorated overall and in periods of low liquidity, transaction costs rise more than we used to see in similar periods before 2011.

Economists expect the Fed to taper in September.

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