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IMF Report Also Sees Threatening Bond Market Liquidity Shortage

Oct. 20, 2019 (EIRNS)—Other aspects of the IMF’s new “Global Financial Stability Report 2019,” not yet reported by EIR, indicate the seriousness of the oncoming financial crisis, which the IMF staff report as directly linked to an industrial recession and falling capital investment.

The Financial Times Oct. 20 raises a different and more immediately serious issue in the IMF report, in light of the Federal Reserve’s sudden, severe, continuing problems with liquidity in the U.S. interbank loan market since Sept. 16. The Fund warned that

“Bond fundsholding assets worth about $1.7 trillion could face difficulties in repaying investors”—just what set off panic among mutual funds, their investors, the Treasury, and Members of Congress in late summer 2008. To say, as the Financial Times does, that this “could potentially destabilize the global financial system,”

is an understatement.

Put simply, what the Fund is warning about is that zero and negative yields on—at the moment—$15 trillion in bonds, mean that large institutional investors must trade their bond holdings and speculate to make income; and the bond funds they invest in are not making money on bonds, with which to cash these investors out as they decide to. Trying to overcome this—“hunting for yield”—the funds go into more illiquid speculations, and much “lower quality” assets, and lack cash. Bonds are core holdings for institutions worldwide.

The IMF examined a sample of 1,760 bond funds (about 60% of fixed-income assets worldwide). It found that one-sixth of them (one-half of the high-yield funds that invest in low-quality corporate debt) can’t meet redemption demands they have already experienced. “The total shortfall across the fixed-income sector is estimated to have reached $160 billion,” if all funds were experiencing simultaneous liquidity demands.

The IMF’s “extreme case” is easy to see coming: Fire sales of “good” assets to meet redemption demands on illiquid, bad ones, and a repeat of the 2008 mutual fund debacle. The “repo” market may be experiencing early stages now.

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