The Music Goes on and on

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#79
'Liquidity paradox' hits

Mark Mulligan
473 words
14 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Extreme easing by central banks has led to crowded trades in a range of financial assets, causing large-scale mismatches in the number of buyers and sellers, Citi says.

The US investment bank warns that this "liquidity paradox" - so called because the more liquidity central banks add, the higher the risk of a serious liquidity crunch - started out in corporate bond markets but is now distorting government bond, currency and share markets.

It says while the post-financial crisis crackdown on own-account trading by investment houses was partly to blame for a decline in professional market-making, the increased difficulty of finding buyers because everyone is selling at once owes more to central banks' hold on markets since the crisis.

With governments too indebted to stimulate broken economies, central banks in the last eight years have stepped up to encourage spending and investment through near-zero per cent interest rates.

Quantitative easing, where they buy government bonds to anchor long-term interest rates and push liquidity into other assets, has been used in the US, UK, Japan and European Union to help kick-start moribund economies. However, this form of monetary policy has encouraged a herd mentality among pension funds, insurance companies, trading houses and other professional investors, Citi says.

"We argue that in addition to regulations, central banks' distortion of markets has reduced the heterogeneity of the investor base, forcing them to be 'the same way round' over the past four years to a greater extent than ever previously," the banks says.

"This creates markets which trend strongly, but are then prone to sudden corrections.

"It also leaves investors more focused on central banks than ever before - and is liable to make it impossible for the central banks to make a smooth exit."

The warning is just the latest in a series by economists, central bank officials and other investment specialists in recent years. They say record-low bond yields are making price trading in fixed-income assets attractive, but also driving equity valuations beyond where they relate to fundamentals. Investors are also crowding into high-risk corporate bonds in the yield hunt.

Relentless betting on central bank rate movements around the world - particularly on those of the US Federal Reserve - is also feeding volatility in currency markets.

Markets last week were particularly tumultuous as investors dumped government bonds after deciding disinflation pressures in Europe had eased. There was another sell-off on Tuesday this week as investors became nervous ahead of heavy new issuance.

AllianceBernstein senior portfolio manager for fixed income investments Jeremy Cunningham in March warned that cuts in market-making by investment banks, coupled with underpriced risk in some credit classes, would lead to liquidity crunches as the US began lifting interest rates for the first time in almost a decade.


Fairfax Media Management Pty Limited

Document AFNR000020150513eb5e0002n
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The Music Goes on and on - by BlueKelah - 13-02-2014, 08:45 AM
RE: The Music Goes on and on - by BlueKelah - 13-02-2014, 08:46 AM
RE: The Music Goes on and on - by Wildreamz - 13-02-2014, 04:03 PM
RE: The Music Goes on and on - by freedom - 13-02-2014, 08:49 AM
RE: The Music Goes on and on - by specuvestor - 13-02-2014, 03:04 PM
RE: The Music Goes on and on - by freedom - 13-02-2014, 03:50 PM
RE: The Music Goes on and on - by specuvestor - 13-02-2014, 07:02 PM
RE: The Music Goes on and on - by freedom - 13-02-2014, 07:23 PM
RE: The Music Goes on and on - by specuvestor - 14-02-2014, 04:18 PM
RE: The Music Goes on and on - by specuvestor - 06-08-2014, 07:37 AM
RE: The Music Goes on and on - by freedom - 14-02-2014, 05:13 PM
RE: The Music Goes on and on - by specuvestor - 18-02-2014, 12:00 PM
RE: The Music Goes on and on - by specuvestor - 19-05-2014, 11:58 AM
RE: The Music Goes on and on - by specuvestor - 03-07-2014, 06:34 PM
RE: The Music Goes on and on - by specuvestor - 14-02-2014, 06:06 PM
RE: The Music Goes on and on - by freedom - 14-02-2014, 09:26 PM
RE: The Music Goes on and on - by freedom - 18-02-2014, 01:22 PM
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RE: The Music Goes on and on - by BlueKelah - 18-02-2014, 07:59 PM
RE: The Music Goes on and on - by WolfT - 18-02-2014, 09:13 PM
RE: The Music Goes on and on - by BlueKelah - 18-02-2014, 09:21 PM
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RE: The Music Goes on and on - by greengiraffe - 13-10-2014, 10:53 PM
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RE: The Music Goes on and on - by CityFarmer - 14-10-2014, 09:25 AM
RE: The Music Goes on and on - by greengiraffe - 14-10-2014, 03:52 PM
RE: The Music Goes on and on - by greengiraffe - 14-10-2014, 10:36 PM
RE: The Music Goes on and on - by greengiraffe - 14-10-2014, 10:41 PM
RE: The Music Goes on and on - by greengiraffe - 15-10-2014, 07:52 AM
RE: The Music Goes on and on - by greengiraffe - 17-10-2014, 06:39 AM
RE: The Music Goes on and on - by greengiraffe - 17-10-2014, 11:16 PM
RE: The Music Goes on and on - by greengiraffe - 17-10-2014, 07:14 AM
RE: The Music Goes on and on - by greengiraffe - 19-10-2014, 10:37 PM
RE: The Music Goes on and on - by greengiraffe - 25-10-2014, 08:11 AM
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RE: The Music Goes on and on - by greengiraffe - 22-11-2014, 02:21 PM
RE: The Music Goes on and on - by greengiraffe - 25-11-2014, 10:31 PM
RE: The Music Goes on and on - by greengiraffe - 06-12-2014, 06:34 PM
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RE: The Music Goes on and on - by CityFarmer - 08-12-2014, 11:12 AM
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RE: The Music Goes on and on - by greengiraffe - 02-01-2015, 05:35 PM
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RE: The Music Goes on and on - by greengiraffe - 30-07-2015, 10:41 AM
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RE: The Music Goes on and on - by BlueKelah - 27-08-2015, 09:46 AM
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RE: The Music Goes on and on - by thor666 - 12-10-2015, 06:55 AM
RE: The Music Goes on and on - by greengiraffe - 19-10-2015, 07:01 AM
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RE: The Music Goes on and on - by greengiraffe - 22-10-2015, 07:07 AM
RE: The Music Goes on and on - by greengiraffe - 26-10-2015, 06:52 AM
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RE: The Music Goes on and on - by greengiraffe - 22-11-2015, 12:49 PM
RE: The Music Goes on and on - by brattzz - 22-11-2015, 12:59 PM
RE: The Music Goes on and on - by greengiraffe - 30-11-2015, 02:34 PM

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