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To Solve Liquidity Drought, Investors Try to be Future(s) Perfect  

June 15, 2015

Christopher Whittal, MoneyBeat

Hardly a week passes without a senior regulator talking about dwindling liquidity and rising volatility in financial markets. Bank of England Governor Mark Carney says has said it poses “a clear risk to financial stability”. ECB President Mario Draghi has told investors to “get used” to it.

Crazy price swings have become commonplace in government bond markets. But beyond that, what hard evidence is there of reduced liquidity?

To solve this puzzle, UBS strategists have started to examine the futures market.

Discussions with UBS clients reveal many of them have started to rely on futures markets “when they truly need liquidity”. A pick-up in futures volumes over the past few months relative to U.S. Treasury bond volumes confirms this trend.

If a market is liquid, investors can buy or sell large chunks of securities without moving the price too much. Markets tend to become less liquid during times of turmoil. If everyone wants to sell the same thing at the same time, prices will head south – and fast.

Traditionally, banks have acted as shock absorbers in the market, buying bonds when investors want to sell, even if they can’t offload them quickly to another client. Beefed up regulation, and lower returns, have encouraged banks to step back from government bond trading over the past few years.

Read more: MoneyBeat

 
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