4 ms·

are people worried about bond market liquidity?

• vegabook 11y ago
  yes. The constant threat of a big dominating presence of the authorities in the market, causes two-way flows to decline. You cannot rely on your macro skill set anymore to analyze the market direction, as anything you do is subject to policy maker event risk. Therefore faster money (read, speculators), who are the major providers of liquidity, stay away. It doesn't help that banks' risk taking, historically a big source of liquidity too, has been curtailed by regulation, but that is not the only story. It's also about the drunken elephant stomping all over the market known as QE/zero rates policy. So paradoxically, as the stock of bonds is ballooning, the liquidity is shrinking. It was always the fact of course that the front end of the yield curve had policy event risk in it, but then you also had the shape of the curve which the market could use to intimidate the policy maker (too steep = a signal that the market was unhappy with policy). Today, the Feds have decided not only to guide the short end, but also to put the rest of the curve where they want it, and that's the underlying source of the problem. Basically, the market is rigged. Nobody likes to bet in a rigged market.