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42 posts on "Liquidity"

October 05, 2016

Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?



LSE_Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?

Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread—the yield of a corporate bond minus the yield of a Treasury bond of the same maturity—of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non‑energy firms also rose even though many non‑energy firms might be expected to benefit from lower energy‑related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non‑energy firms had to be sold to satisfy investors who withdrew from bond funds in response to falling energy prices.

Continue reading "Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?" »

July 13, 2016

Could Liquidity Regulation Revive the Bank Lending Channel?

Dong Beom Choi and Ulysses Velasquez

LSE_Could Liquidity Regulation Revive the Bank Lending Channel?

How does monetary policy affect spending in the economy? The economic literature suggests two main channels of monetary transmission: the money or interest rate channel and the bank lending channel. The first view focuses on changes in real interest rates resulting from a shift in monetary policy and corresponding responses in consumption, saving, and investment. The second view focuses on changes in the supply of bank credit resulting from an altered policy stance and concomitant changes in spending.

Continue reading "Could Liquidity Regulation Revive the Bank Lending Channel?" »

Posted by Blog Author at 7:00 AM in Credit, Liquidity, Regulation | Permalink | Comments (2)

February 19, 2016

Quantifying Potential Spillovers from Runs on High-Yield Funds



Liquidity Series III: Tenth of eleven posts

On December 9, 2015, Third Avenue Focused Credit Fund (FCF) announced a “Plan of Liquidation,” effectively halting investor redemptions. This announcement followed a period of poor performance and large outflows. Assets at the fund had declined from a peak of $2.5 billion in May of 2015 to $942 million in November. Investors had redeemed more than $1.1 billion in shares since April 2015, and the fund’s year-to-date performance as of November had fallen below -21 percent. The FCF “run” highlights the need to quantify the potential for systemic risk among open-end mutual funds and the potential for contagion in the event of more widespread runs on other vulnerable funds. In this post, we first characterize open-end mutual funds that seem vulnerable to redemptions in much the same way as FCF. We then analyze the potential for fire-sale spillovers to other mutual funds if large redemptions in “at-risk” funds were to occur.


Continue reading "Quantifying Potential Spillovers from Runs on High-Yield Funds" »

February 16, 2016

The Workup, Technology, and Price Discovery in the Interdealer Market for U.S. Treasury Securities



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The interdealer market for Treasury securities shares many features with other highly liquid markets that trade electronically using anonymous central limit order books. The interdealer Treasury market, however, contains a unique trading protocol, the so-called workup, that accounts for the majority of interdealer trading volume. While the workup is designed to enhance liquidity in a market with diverse participation, it may also delay certain price-improving order book adjustments and therefore affect price discovery. In this post, we exploit the tight relationship between the ten-year Treasury note traded on the BrokerTec platform and the corresponding Treasury futures contract to explore how the workup protocol affects trading in the interdealer market and to highlight the impact of technological changes on observed trading behaviors.


Continue reading "The Workup, Technology, and Price Discovery in the Interdealer Market for U.S. Treasury Securities" »

February 11, 2016

Is Treasury Market Liquidity Becoming More Concentrated?



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In an earlier post, we showed that Treasury market liquidity appears reasonably good by historical standards. That analysis focused on the most liquid benchmark securities, largely because data availability is best for those securities. However, some studies, such as this one and this one, report that market liquidity is concentrating in the most liquid securities at the expense of the less liquid, so that looking only at the benchmark securities gives a misleading impression. In this post, I look at trading volume information reported by the Federal Reserve to test whether liquidity is becoming more concentrated.

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Posted by Blog Author at 7:00 AM in Financial Markets, Liquidity, Treasury | Permalink | Comments (0)

February 10, 2016

Further Analysis of Corporate Bond Market Liquidity



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Our earlier analyses from last October and earlier in this series looked at market liquidity measures averaged across all corporate bonds or broad sub-groups of corporate bonds. Commentators have pointed out that such broad averages might mask important differences among narrower sub-groups of bonds and that relatively illiquid bonds, in particular, have suffered the largest reductions in liquidity. In this post, we consider these arguments by examining how corporate bond market liquidity has changed over time depending on the size and credit rating of the issue.

Continue reading "Further Analysis of Corporate Bond Market Liquidity" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Liquidity | Permalink | Comments (0)

February 09, 2016

Corporate Bond Market Liquidity Redux: More Price-Based Evidence



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In a recent post, we presented some preliminary evidence suggesting that corporate bond market liquidity is ample. That evidence relied on bid-ask spread and price impact measures. The findings generated significant discussion, with some market participants wondering about the magnitudes of our estimates, their robustness, and whether such measures adequately capture recent changes in liquidity. In this post, we revisit these measures to more thoroughly document how they have varied over time and the importance of particular estimation approaches, trade size, trade frequency, and the dichotomy between investment-grade and high-yield bonds.

Continue reading "Corporate Bond Market Liquidity Redux: More Price-Based Evidence" »

Posted by Blog Author at 7:00 AM in Financial Markets, Liquidity | Permalink | Comments (0)

February 08, 2016

Has MBS Market Liquidity Deteriorated?



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Mortgage-backed securities guaranteed by the government-backed entities Fannie Mae, Freddie Mac, and Ginnie Mae, or so-called “agency MBS,” are the primary funding source for U.S. residential housing. A significant deterioration in the liquidity of the MBS market could lead investors to demand a premium for transacting in this important market, ultimately raising borrowing costs for U.S. homeowners. This post looks for evidence of changes in agency MBS market liquidity, complementing similar posts studying liquidity in U.S. Treasury and corporate bond markets.

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Posted by Blog Author at 7:02 AM in Financial Markets, Housing, Liquidity | Permalink | Comments (0)

Continuing the Conversation on Liquidity



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Market participants and policymakers have raised concerns about market liquidity—the ability to buy and sell securities quickly, at any time, at minimal cost. Market liquidity supports the efficient allocation of financial capital, which is a catalyst for sustainable economic growth. Any possible decline in market liquidity, whether due to regulation or otherwise, is of interest to policymakers and market participants alike.

Continue reading "Continuing the Conversation on Liquidity" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Liquidity | Permalink | Comments (0)

December 07, 2015

Dealer Positioning and Expected Returns



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Securities broker-dealers (dealers) trade securities on behalf of their customers and themselves. Recently, analysts have pointed to the decline in U.S. dealers’ corporate bond inventories as evidence that dealers’ market making capacity is impaired. However, historically such inventories also reflect dealers’ risk management and proprietary trading activities. In this post, we take a long-term perspective on the evolution of dealers’ inventories of corporate bonds, Treasuries, and other debt securities and relate those inventories to expected returns in fixed-income markets in an effort to better understand the drivers of dealer positioning.


Continue reading "Dealer Positioning and Expected Returns" »

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