If liquidity continues to deteriorate across markets, investors fear that other assets could suffer the kind of wild price swings that have rocked commodities this month, including a one-day doubling in nickel prices and Oil rises to 14-year highs.
“It’s not always clear where the contagion risks are,” said Frances Donald, chief global economist at Manulife Investment Management. “That’s why you have to watch liquidity, not just daily, but hourly at the moment, looking for signs of complications.”
Financial indicators are showing increasing signs of stress in the markets.
The so-called FRA-OIS, which measures the difference between the US three-month interest rate swap and that of the overnight swap index, recently stood at a high since May 2020, while another stress indicator short-term – the spread between three-month US Libor and the interbank swap rate hit a similar high.
Volatility in stocks, currencies and US Treasury yields has also spiked.
In another possible red flag, Barclays on Monday suspended sales of two products linked to crude oil and market volatility, which some saw as a warning of a lack of liquidity.
Among the assets investors have been paring back are emerging-market bonds, which saw $3.54 billion of net outflows last week, the biggest reduction since April 2020. Treasuries, meanwhile, posted about $5.4 billion. dollars in inflows in the past nine weeks, according to BofA Global Research.
Mike Vogelzang, chief investment officer at CAPTRUST in Boston, said his firm had taken “aggressive steps” in response to the Ukraine crisis to lower the risk profile of its portfolios, including reducing equity exposure. and the sale of mortgages and a series of corporate bonds, replacing them with highly liquid short-term US Treasury bonds.
“We are concerned about a possible global liquidity scare,” he said. “We had been significantly underweight US Treasuries relative to our benchmarks for years, so we really filled that bucket and reduced the potential for illiquidity in our portfolios.”