09 April 2020
Liquidity has improved in the past week over growing optimism about an earlier reopening of economies currently under lockdown. This has led to an improvement in market sentiment, lower volatility and gains in risky assets.
At the same time, various quantitative easing (QE) bond buying programmes - either upsized, new or restarted - are now in full flow. These are having a meaningful impact on a number of specific areas of the fixed income market, such as European peripheral and European corporate bonds, which have been buoyed by the European Central Bank or the GBP corporate bond purchases started by the Bank of England.
The improvement in the market backdrop has reduced estimated transaction costs, particularly since our previous update, with tighter bid-ask spreads and better market depth. While this is obviously a positive, it masks a significant dispersion between higher quality ‘haves’ and ‘have-nots’. The latter refers to lower quality issuers which don’t directly benefit from central bank support and as a result, lag both in terms of performance and relative liquidity.
With the long Easter weekend approaching in most markets, we are unlikely to see liquidity improve any further. Looking further ahead, liquidity conditions will remain highly correlated to overall risk sentiment. Still, the size of the shock and the ongoing impact of a less agile market place, as most investors and intermediaries are still working remotely as part of business continuity measures taken, make it very unlikely that we will return to the prior ‘normal’ market conditions anytime soon.
Source: Fidelity International, 8 April 2020.
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