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Looming liquidity drain raises bond market risks

Posted by Oxford Economics on Jun 19, 2018 3:25:57 PM

Markets’ attention in recent weeks and months has been focused intently on central bank policy actions as the US Federal Reserve and European Central Bank have pressed ahead with further moves toward ending the era of historically low interest rates and easy money. Yet beneath the surface of the world economy, potent trends in global liquidity driven by the vast capital flows across fixed income markets have commanded far less scrutiny – despite far-reaching implications.

A large liquidity squeeze looms, with equally large potential consequences. Cross-border bond purchases by fixed income investors could plausibly drop by more than half this year and next, to an average of only $500 billion a year, versus 2017’s tally of $1.2 trillion.

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Topics: Global economics, ECB, Bond market, Fixed income, Capital flows, Federal Reserve, Quantitative easing, Dollar, Euro, Global liquidity, Global economy

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