Which areas are at risk of a liquidity mismatch?

Liquidity has become a top concern for investors, according to Amundi, and emerging markets, the UK and high yield bonds could all be at risk of a liquidity mismatch in the future.

Earlier this year, a report by the UK’s Bank of England highlighted the mismatch between redemption terms and liquidity of some funds’ assets could become a ‘systemic issue’.

In a report on liquidity, Amundi group chief investment officer Pascal Blanqué and Vincent Mortier, deputy group chief investment officer, said certain emerging markets were likely to experience a liquidity mismatch in the future as they relied on foreign capital inflows.

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“Among the areas most likely to experience liquidity mismatches, some emerging markets are certainly key, as they rely heavily on foreign capital inflows. Those tensions could intensify as the cycle matures, the economic slowdown turns into recession and it becomes difficult to find buyers for illiquid assets.”

“The United Kingdom is another area of vulnerability as far as liquidity management is concerned. With the Brexit deadline of October 31 approaching, the European Securities and Markets Authority (ESMA) and other financial supervisors have been preparing contingency plans to assure business and liquidity continuity in case of a no-deal exit.

“Finally, high-yield (HY) bonds are also a vulnerable segment, as shown by a recent ESMA analysis, which found that up to 40% of European HY bond funds would not have enough liquidity to meet investors’ withdrawals in case of a market shock. Furthermore, if they concentrate their asset sales, they will create downward pressure on prices, as daily trading volumes in the HY market are not as deep as a heavy-redemption scenario would require.”

He suggested asset managers used tools such as liquidity watch, monitoring of price swings to protect investors from performance dilution and building liquidity buffers to boost fund’s counterbalancing capacity in distressed market conditions. As a last resort, they could use their own balance sheet to prop up their own funds.


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