Goldman: 'Tide going out' on corporate bond liquidity

http://www.ft.com/fastft/422741/tide-going-out-on-corporate-bond-liquidity-says-goldman

Dealer banks are all out of corporate bonds, says Goldman Sachs, an observation that's likely to excite those who fret about thin market liquidity. "We are increasingly of the view that 'the tide is going out' on corporate bond market liquidity," it says.
In a new note penned by analysts Charles Himmelberg and Chris Henson, Goldman says "dealer inventories of long-term investment-grade bonds and high-yield bonds have turned negative for the first time since the NY Fed started reporting corporates separate from non-agency mortgage mortgage-backed securities" writes Katie Martin.
It's not unusual for this to happen with US government debt, the bank says. But for corporate debt, this is very peculiar indeed.
The bank says:

To some degree, the inventory drawdown is probably a byproduct of strong customer demand.
The rally in credit spreads since Oct. 2 was helped in part by a resumption of mutual fund inflows at a time when dealer inventories were already substantially depleted. In addition, high-yield new issue volumes – which drive dealer inventory holdings because they drive secondary trading volume -- have cooled somewhat.

But that can't account for the full scale of the decline of dealers' holdings, the bank says.
It adds:

Negative inventory levels mark an impressive milestone for the trending declines in dealer inventory holdings of corporate bonds over the post-crisis period. We feel fairly confident that the recent declines are the result of transitory market factors. But the more we study the problem, the more we are convinced that low market liquidity is the "new normal" for corporate bond markets.

The rising cost of hedging and corporate bonds, particularly as trading volumes in credit default swaps declines, seems to be making this worse, Goldman reckons, and it adds:

There is still a large gap between this understanding of how the market is evolving and the narrative proposed by non-market participants.

 Dimon said there would be a liquidity shock. This is the early stages of it. Cash is king.