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Fitch is warning about investment-fund induced liquidity mismatches:

Fitch says that investment in open-ended bond funds has surged since the global financial crisis, thanks to factors such as the prevalence of historically low interest rates and tougher bank regulation. It reports that the latest data from the Financial Stability Board shows that investment funds (including open-ended and other fund types) grew by an average of 12.3% annually between 2008 and 2016, and that assets under management in bond funds grew to a high of almost US$11 trillion last year.

“Open-ended bond funds provide daily liquidity for investors but are increasingly investing in longer-dated or lower-quality securities as bank regulation has reduced the supply of market liquidity and investors are seeking extra yield while interest rates remain low,” it says. “This exposes funds to liquidity pressure if there is a spike in redemptions, potentially leading to forced asset sales and a run on the fund as investors pull out.”

This sort of stress could, in turn, spread throughout the financial system, Fitch says, due to connections between funds, banks, non-bank financial institutions (NBFIs) and the rest of the financial market. “Transmission to other institutions could be as a result of market value declines in the types of collateral that they have in common with the funds. Banks and NBFIs could also be exposed through their short-term funding reliance on the funds or other counterparty exposure to them,” it says.

This entry was posted on Monday, February 11th, 2019 at 8:52 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.