Liquidity Scares

In June of this year our missive, “scary times” touched on the increased volatility within the financial markets and gathering “liquidity problems,” going on to suggest that the bond space is about to get a lot scarier yet.

Also observed, were surging bond yields, particularly at the two-year duration, reminding that, “It’s the market that decides on the interest rates that matter, not a central banker,” A subsequent August article, “revisiting the No 2’s,” showed a chart of UK and US two-year government bond yields, which had jumped by a respective 63% and 53% over a short 6-month period.

Well, liquidity is turning fast to illiquidity, as evidenced by an updated chart of the UK and US No 2’s:

13 Feb 2015 Blog 2

Fact 1: Whilst the central banks have been deluding the many, including themselves, that they control interest rates, the fact is that for the UK and US government (s) the cost of borrowing for 2-years has near trebled since April 2013.

Fact 2: The spread between the yield on “Junk Debt,” and there have been $trillions of that issued over the past few years, and the US 10-year Treasury yield is widening fast, as can be seen within the next chart:

13 Nov 2015 Blog 1

This is as good a sign of liquidity problems as you are likely to see. Furthermore, the tightening of credit conditions is a warning for other financial assets, such as stocks, as can be seen by the relationship against the Dow Jones Industrial Average, inverted to better show the correlation.

Scary times indeed.








One response to this post.

  1. […] liquidity disappearing fast, as outlined within our mid November piece, “Liquidity Scares,” it really is time to study the facts, not […]


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