An article in the the Financial Times (gated, but can be read with a free registration) provides yet another timely reminder of how to get out of a burning theatre … which basically comes donw to the sub0heading of the article:
- Sell early to avoid rush for high-yield exit as Fed QE ends
It goes on:
- Yields are near record lows and liquidity in secondary markets is declining, making it harder to exit swiftly. Reducing exposure earlier could be a wise decision.
- banks are now less able to facilitate trading in secondary markets, bound by stricter regulation and higher capital requirements. Low liquidity can “trap” sellers, accelerating price falls
They say that “concerns are well-founded, for at least three reasons” (bolding mine):
- We are approaching the exit from an unprecedented policy easing experiment
- Loose policy has encouraged exuberant risk-taking in credit markets
- Third, and most important, the plumbing of credit markets has changed. Households and mutual funds own 37 per cent of all credit, up from about 29 per cent pre-crisis, according to Fed data. Dealers have less ability to warehouse risk and compensate for market volatility: an index by RBS estimates trading liquidity has dropped 70 per cent since 2007.
What they are saying is reasonable, but its hardly new. And it probably won’t make one jot of difference when the time comes to exit
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As a ps. those who trade less liquid currencies could also benefit from reading it.
NZD/USD doesn’t have the depth of liquidity of EUR/USD, for example. (And … ditto … it probably won’t make a jot of difference when the time comes to exit
)
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pps. Junk bond funds post record outflow
Which central bank governor says he (there’s a clue) sees greater risks of 1930s style crash?
