In Europe, hedge funds, which now dominate bond trading, have contributed to this dynamic by quickly unwinding many of their positions this month.
Investors say they have had difficulty getting quotes or executing trades at times over the past four weeks as market makers fear being left with large positions that could quickly become unprofitable.
– When we try to trade, it takes longer. Market makers want us to be more patient and divide trades into smaller parts, Rajeev De Mello, investment director at GAMA Asset Management, told Reuters, adding that the differences between the buying and selling prices of assets have widened.
Cracks have appeared even in typically deep and liquid sovereign bond markets – a pillar of global finance – which have been hit by inflation fears.
The spread between the bid and ask price of newly issued two-year U.S. Treasuries – a key indicator of market liquidity and transaction costs – increased by about 27% in March. compared to February. This suggests that dealers demand a higher premium for taking risk.
Read also: We explain why fuel is so expensive [WYKRESY]
Pain in the futures market
Reuters notes, Current signs of market stress are not unusual during periods of turbulence, such as during Donald Trump's “Liberation Day” tariffs last year or during the coronavirus pandemic in 2020.
However, the current wave of volatility came at a time when markets were on a strong rally, suggesting a deeper correction and loss of liquidity could occur if the war drags on.
In Europe, the short-term interest rate futures market was particularly hard hit, with investors quickly pricing in sharp increases in interest rates by central banks.
Liquidity at one point dropped to just 10%. normal level – said Daniel Aksan of Morgan Stanley. “It was reminiscent of the COVID times,” he said.
Three European financial regulators warned on Friday that geopolitical tensions, particularly the war in the Middle East, pose a serious threat to global finances through higher energy prices, inflationary pressures and weaker economic growth.
