Monday, 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.

IIF Authors

Hung Tran

Hung Tran Executive Managing Director IIF
Hung
Tran
Executive Managing Director
+1-202-682-7449
htran@iif.com

Sonja Gibbs

Sonja Gibbs Senior Director Global Capital Markets IIF
Sonja
Gibbs
Senior Director, Global Capital Markets
+1-202-857-3325
sgibbs@iif.com

Paul Ticu

Paul
Ticu
Deputy Director
+1-202-857-3301
pticu@iif.com

Z. Elif Aksoy

Z. Elif
Aksoy
Senior Financial Economist
+1-202-857-3647
zaksoy@iif.com

Emre Tiftik

Emre
Tiftik
Deputy Director
+1-202-857-3321
etiftik@iif.com

Fiona Nguyen

Fiona
Nguyen
Senior Research Analyst
+1-202-682-7443
fnguyen@iif.com

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