Was the Volcker Rule bad for bond market liquidity?

"With regard to intended effects, we find no statistical evidence that the Volcker rule reduced dealer risk-taking as measured by the standard deviation of covered dealers’ corporate bond trading returns. Rather, our analysis suggests that covered firms’ risk-taking has experienced an increase on short-term trades. Given the short time in inventory, some or most of these transactions could more easily qualify for the rule’s market making exemption. Longer-term trading activity of covered firms, which we would expect to face more scrutiny under the rule, shows no statistically significant change in risk-taking, although the coefficients are in the direction of lower risk.

"As for unintended consequences on corporate bond market liquidity, we find evidence that the rule has increased the markups Volcker-covered dealers charge their clients even on trades that we would anticipate would qualify for the rule’s market making exemption. Specifically, we find that Volcker-covered firms are charging 20-45 basis points higher markups when conducting short-term trades, i.e., roundtrip trades under 15 minutes and roundtrip trades within one day. These findings are highly significant, both statistically and economically. While we would expect these transactions to be exempt, Volcker-covered dealers still appear to be charging customers a premium for these trades after the Volcker rule’s implementation."

—  Office of Financial Research

Inflated bond ratings helped spur the financial crisis. They're back.

Credit-grading firms are giving out increasingly optimistic appraisals as they fight for market share in booming debt-securities markets. (The Wall Street Journal | Jul 8)

Junk bond spreads widen by most in three years

Flight from risky assets in trade war’s wake extended to the fixed-income market.

Investors fled junk bonds amid the market turmoil that followed the escalation of the US-China trade war on Monday, with the spread over risk-free bonds widening by the most in three years. (Financial Times | Aug 6)

Yield curve sends strongest recession warning since 2007

The inverted yield curve, which occurs when the three-month US Treasury yield is higher than the 10-year yield and which gives an early sign of recession, has offered the strongest signal since 2007. The spread widened to 32 basis points. (Bloomberg Markets | Aug 5)

Regulators take another look at swaps market

Regulators including the Securities and Exchange Commission, the Commodity Futures Trading Commission and the UK Financial Conduct Authority have increased scrutiny of questionable and potentially manipulative trades of credit default swaps. (Bloomberg Markets | Aug 5)

Inside New York Fed, abrupt ousters shake staff and sink morale

As the  financial world watches the White House turn up the heat on the Federal Reserve in Washington, another Fed drama has been playing out right on Wall Street’s doorstep. (Bloomberg Economics | Aug 4)

North Korea hacks banks, cryptocurrencies for funds, UN finds

North Korea has mastered hacking into both old and new financial systems to funnel billions of dollars to its nuclear weapons program, a new United Nations report found. North Korean agents have amassed about $2 billion by stealing money from financial institutions and cryptocurrency exchanges, a panel monitoring the enforcement of UN sanctions said in a report to the Security Council. 

—  Bloomberg Cybersecurity

SystemBC creates backdoor for malware on Windows systems

Cybersecurity researchers say SystemBC malware installs a proxy on infected Windows systems and enables other malware to be integrated and deployed without being detected by local firewalls or internet content filters, and connect to command-and-control servers without giving away IP addresses. Researchers at Proofpoint say the malware is being marketed on at least one hacking forum and distributed in exploit kits including RIG and Fallout.

—  ZDNet

New MegaCortex hits companies with ransom demands

Corporate resources are being attacked by a new variant of MegaCortex, and that variant has made more than $5.8 million in ransom demands across Europe and the US. Researchers say the new variant of MegaCortex sacrifices some security features in favor of automation allowing it to self-execute with a hard-coded password.

—  ZDNet

6 reasons we make bad decisions, and what to do about them

Research has shown that that the typical person makes about 2,000 decisions every waking hour . Most decisions are minor and we make them instinctively or automatically — what to wear to work in the morning, whether to eat lunch now or in ten minutes, etc. But many of the decisions we make throughout the day take real thought, and have serious consequences.

—  Harvard Business Review

Universal laws of the world

If something is true in one field it’s probably true in others. Restricting your attention to your own field blinds you to how many important things people from other fields have figured out that are relevant to your own. Here are a few laws —  some scientific, some not —  from specific fields that hold universal truths.

—  Collaborative Fund

Wall Street bonuses to take a hit from this year's trading slump

The  worst first half in a decade for Wall Street’s trading desks is poised to hit year-end pay. Bonuses for equities traders could fall as much as 15% from a year earlier, while their fixed-income counterparts could see a 10% drop, according to a report released Tuesday. It predicts total incentive compensation for investment and commercial banks will drop in 2019 — the third time in the last four years — on geopolitical and rate uncertainty.

—  Bloomberg Business