CitiGroup Warns Investors On $3 Trillion Bond Trade

CITIFor all the concern that Wall Street?s shrinking balance sheets will fuel a liquidity crisis when investors flee credit markets, Citigroup Inc. strategist Stephen Antczak says investors may be overlooking an even bigger catalyst.

The size of the U.S. corporate-bond market has ballooned by $3.7 trillion during the past decade, yet almost all of that growth is concentrated in the hands of three types of buyers: mutual funds, foreign investors and insurance companies, according to Citigroup. That combination could lead to more selling than the market can absorb when the Federal Reserve raises interest rates for the first time since 2006, Antczak said.

Corporate Bond Concentration

?All the money is going to the same place, and when something adversely impacts one, chances are the same factor adversely impacts everyone else, and there?s nobody there to take the other side,? Antczak said in a telephone interview. ?We used to have 23 types of investors in the market. Now we have three. In my mind, that?s the key driver.?

The three investor groups hold almost two-thirds of total corporate debt, Citigroup data show. Mutual funds, which are forced to sell when investors redeem cash, grew the fastest, more than doubling their share to 22 percent in 10 years. Overseas investors now hold almost a quarter of the market. Wells Fargo & Co. analysts warned last month that those buyers may be prompted to exit if the dollar weakened at the same time bond yields rose.

Liquidity Warnings

Hedge funds, government pension funds and securities brokers are among 20 other groups that hold 37 percent.

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