Market Liquidity Continues to Deteriorate

Apollo Chief Economist

Liquidity is getting worse in government bond markets, credit markets, and equity markets see charts below. The sources of low liquidity in financial markets are passive investment strategies, high-frequency trading, and less risk-taking by some brokers.

Government bond markets: Liquidity worsening
Source: Bloomberg, Apollo Chief Economist (Note: The index displays the average yield error across the universe of government notes and bonds with remaining maturity 1-year or greater, based off the intra-day Bloomberg relative value curve fitter. When liquidity conditions are favorable the average yield errors are small as any dislocations from fair values are normalized within a short time frame. Average yield error is defined as an aggregate measure for dislocations in Treasury securities across the curve.)
Corporate bond markets: Liquidity worsening
Source: FRB of New York, Apollo Chief Economist (Note: Corporate bonds are a key source of funding for U.S. non-financial corporations and a key investment security for insurance companies, pension funds, and mutual funds. Distress in the corporate bond market can thus both impair access to credit for corporate borrowers and reduce investment opportunities for key financial sub-sectors. CMDI offers a single measure to quantify joint dislocations in the primary and secondary corporate bond markets. Ranging from 0 to 1, a higher level of CMDI corresponds with historically extreme levels of dislocation. CMDI links bond market functioning to future economic activity through a new measure.
US equities: Liquidity worsening
Source: Bloomberg, Apollo Chief Economist

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