Goldman Sachs has a scary warning for the bond markets

Goldman Sachs seems worried about bond-market liquidity.

In a note to clients Tuesday, Charles Himmelberg and Chris Henson at Goldman Sachs dissect the recent decline in dealer inventories of investment-grade corporate bonds.

This sounds arcane and boring, but their analysis is one of the most important and troubling things we’ve read about bond-market liquidity.

Now, bond-market liquidity as a topic also seems arcane and boring, but is central to thinking about how modern markets function and has been the No. 1 topic of discussion for months now.

The baseline finding in Goldman’s note is that for the first time since this number has been measured, dealer inventories of investment-grade corporate bonds is negative. These are bonds of companies like Apple, which are least likely, in the market’s view, to default on their debt.

By negative, Goldman means that when taking the long-term holdings of investment-grade dealers and netting out the short-term holdings — defined as bonds maturing in less than a year — the balance held by dealers is negative.

This means that primary dealers — so, the people who match buyers and sellers in the market — don’t have many bonds on hand.