Wednesday, December 27, 2006

The week that isn't.

Accrued Interest is back after a great Christmas. Hope every one had a great holiday as well.

The week between Christmas and New Years is always a weird week. Many proprietary buyers (banks, insurance companies, etc.) are focused on getting their books in order for year-end, and are often not doing anything in the market this week. Meanwhile, mutual funds are trying to do a little window dressing before they have to disclose their portfolio holdings. They are also dealing with year-end related withdrawals, be that for IRA distributions, gifting, or taxes. Dealer desks are generally trying to pare inventory as it makes their ROA look better when quarterly and annual reports come out.

What's that mean to investors? If you aren't subject to these artificial constraints, and you are in the market to buy bonds, you might be able to get some deals. Particularly if you can be flexible. Over the last two weeks I've received several calls from traders saying "Tell me where you care on this bond." That translates as "I really really really REALLY REALLY REALLY REALLY want to sell this, you name your price."

On the flip side, if you want to sell something, liquidity blows this week. The same trader who just called you trying to give away his positions isn't too keen on bidding on anything. If you are managing your own portfolio of bonds, here's a tip: figure out what cash you will need at year-end before Thanksgiving. Sell bonds before 12/1. Or else get a margin loan and sell bonds in January. In the municipal market, January 1 is the biggest coupon paying date of the year (along with 7/1), so lots of cash flows into the market that people are looking to reinvest. Combine that with low dealer inventories, and you have a situation where municipals are often very well bid in January.


Anonymous said...

liquidity is always an issue this year-ending week .... it's very easy to push prices around with absolutely no size in inventory

Anonymous said...

Great blog