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October 2014 Capital Markets Monitor: The Illusion of Liquidity
September 29, 2014 — The divergence in economic performance and monetary policy between the U.S./UK and the Euro Area/Japan will be accentuated by actual policy moves in the coming months, heightening uncertainty in financial markets. Rising volatility in recent weeks, notably in FX markets, reflects this perception of a higher degree of policy risk.
Normalization of US monetary policy will test the notion that the market calm and low volatility environment that has reigned over financial markets in recent years is but an “illusion of liquidity,” created by and dependent on near-zero interest rates—and will thus be reversed when rates rise. In this context, a divergence between liquid primary bond markets—which have seen record new corporate bond issuance in recent years—and deteriorating secondary market liquidity could exacerbate the difficult adjustment process, potentially making it disorderly.
Following the publication of the October 2014 Capital Markets Monitor, Hung Tran, IIF Executive Managing Director, and Sonja Gibbs, Director of Capital Markets and Emerging Markets Policy hosted a teleconference on September 30, 2014. The recording of the briefing and the Q & A session is now available for replay.