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50 posts on "Liquidity"

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.

Continue reading "Is Treasury Market Liquidity Becoming More Concentrated?" »

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.

Continue reading "Has MBS Market Liquidity Deteriorated?" »

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" »

October 09, 2015

The Liquidity Mirage



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Sixth in a six-part series

Market efficiency is often pointed to as a main benefit of automated and high-frequency trading (HFT) in U.S. Treasury markets. Fresh information arriving in the market place is reflected in prices almost instantaneously, ensuring that market makers can maintain tight spreads and that consistent pricing of closely related assets generally prevails. While the positive developments in market functioning due to HFT have been widely acknowledged, we argue that the (price) efficiency gain comes at the cost of making the real-time assessment of market liquidity across multiple venues more difficult. This situation, which we term the liquidity mirage, arises because market participants respond not only to news about fundamentals but also market activity itself. This can lead to order placement and execution in one market affecting liquidity provision across related markets almost instantly. The modern market structure therefore implicitly involves a trade-off between increased price efficiency and heightened uncertainty about the overall available liquidity in the market.

Continue reading "The Liquidity Mirage " »

Posted by Blog Author at 7:00 AM in Financial Markets, Liquidity | Permalink | Comments (3)

October 08, 2015

Redemption Risk of Bond Mutual Funds and Dealer Positioning



Fifth in a six-part series
Market participants have recently voiced concerns that bond markets seem to become illiquid precisely when they want to sell bonds. Some possible reasons for a decline in corporate bond market liquidity in times of stress include the increasing share of corporate bond ownership by mutual funds and the reduced share of corporate bond ownership by dealers. In this post, we examine the potential effects of outflows from bond mutual funds and the role of dealers’ positioning in corporate bonds.

Continue reading "Redemption Risk of Bond Mutual Funds and Dealer Positioning" »

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