The shift carries direct implications for how independent financial advisors build portfolios, assess risk, and talk to clients about where liquidity comes from and whether it will be there when markets turn.
“Investors have traditionally thought about liquidity as a characteristic of an asset or investment vehicle,” said Julia Hermann, Global Market Strategist at NYLIM. “We believe it increasingly needs to be understood at the portfolio and financial-system level.”
A new era, decades in the making
NYLIM’s research identifies three distinct phases of U.S. liquidity provision since the 1980s: a bank-led regime that defined the decades before the 2008 financial crisis; a central bank-led era that followed, defined by Federal Reserve balance sheet expansion and quantitative easing; and the current period, which the firm characterizes as nascent and market-led.
Rules introduced under Dodd-Frank in 2010 and the Basel III international framework constrained how much risk banks could carry on their balance sheets. Structured and corporate credit inventories held by dealers – which had peaked near $300 billion before the crisis – collapsed to roughly $50 billion by the end of 2018 as capital and liquidity requirements tightened, according to NYLIM. Private non-bank players stepped into the resulting vacuum.
Today, private, non-official investors hold approximately 60% of outstanding U.S. Treasury debt, up from 37% in 2014, according to NYLIM’s analysis of Federal Reserve and Schwab Center for Financial Research data. Principal trading firms now account for roughly 60% of volume on electronic interdealer Treasury platforms; functions that bank-affiliated dealers once held almost exclusively.