Liquidity strains are unleashing “deep-seated fears that the coronavirus crisis could lead to the same dislocation of financial markets that we saw over a decade ago,” wrote Steven Barrow, head of foreign-exchange strategy at Standard Bank, in a note to clients. “The worst-case scenario for the market is that dollar liquidity shortages start to emerge, putting leveraged borrowers in jeopardy.”
In turn, volatility has spiked. The Bank of America Merrill Lynch MOVE Index, which measures price swings in Treasuries, jumped to the highest level since 2009 Monday. The Cboe Volatility Index for S&P stocks, known as the “fear gauge,” surged to the highest since 2008 and some traders are betting on further gains.
Funds that brace for so-called “black swan” events are one of the few to benefit.
For Nomura’s Hodges, the problem is exacerbated by the proliferation of exchange-traded funds, which track particular asset classes or instruments. When the market goes into freefall, they are required to sell the underlying asset, prompting a frantic search for anyone who will buy it.
“People are asking for bids and then dealing when they see them,” said Luke Hickmore, a money manager at Aberdeen Standard Investments. “You can definitely sell for sure, you just might not like the price.”
--With assistance from Greg Ritchie and Edward Bolingbroke.
This article was provided by Bloomberg News.