IMF warns of mar­ket break­down po­ten­tial due to low rates

The China Post - - WORLD BUSINESS -

Fi­nan­cial mar­kets face a higher risk of liq­uid­ity squeezes in a sell-off due to the ef­fects of the long pe­riod of low in­ter­est rates, the In­ter­na­tional Mon­e­tary Fund said Tues­day.

In a semi-an­nual re­port on global fi­nan­cial sta­bil­ity, the IMF said that mar­kets for trad­ing eq­ui­ties, bonds, cur­ren­cies and other in­stru­ments gen­er­ally ap­pear liq­uid at the mo­ment.

But that liq­uid­ity — the abil­ity of traders to easily buy or sell a large vol­ume of an as­set — could be more “prone to evap­o­rate” in the cur­rent en­vi­ron­ment, caus­ing more volatil­ity and un­der­min­ing fi­nan­cial sta­bil­ity.

“Cen­tral banks and fi­nan­cial su­per­vi­sors need to be pre­pared for episodes of liq­uid­ity break­downs,” said IMF economist Gas­ton Ge­los, one of the au­thors of the new re­port.

“The level of liq­uid­ity in fi­nan­cial mar­kets ... has not shown a marked de­cline in most as­set classes; how- ever, low in­ter­est rates may be mask­ing an ero­sion of its un­der­ly­ing re­silience,” the re­port said.

It said that the low in­ter­est rates at the hands of the world’s lead­ing cen­tral banks in the United States, Europe and Ja­pan have en­cour­aged more risk tak­ing.

At the same time, the cen­tral banks’ quan­ti­ta­tive eas­ing stim­u­lus pro­grams have bol­stered liq­uid­ity, es­pe­cially in bond mar­kets.

But other changes in mar­ket struc­ture have height­ened the risks: the in­vestor base has be­come less di­verse; high-fre­quency and com­put­er­based trad­ing has be­come more pow­er­ful; there has been a rise in small bond is­sues; and many banks have pulled back from ac­tively trad­ing in fi­nan­cial mar­kets, in part due to post-fi­nan­cial cri­sis reg­u­la­tions.

Be­cause of that, the IMF said, once in­ter­est rates rise, mar­ket liq­uid­ity will prob­a­bly de­cline and could do so to an un­nerv­ing de­gree.

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