Income & Fixed Interest Newsletter – July 2018
In last month’s newsletter, I wrote about the pain points in global markets that were being revealed as a result of the roll-back in extraordinary central bank liquidity. Another pain point related to this is the availability of market liquidity. Since the GFC, market liquidity has changed structurally and for the worse. It has not been obvious in recent years because that liquidity, especially for exiting risk, has not been in demand. After all, what with global central banks pushing so much excess liquidity into markets in the last two years, any investor who has turned a blind eye to growing fundamental risks has been well rewarded.
As Australia’s past and present experience demonstrates, the smaller the market and the greater its reliance on global risk appetite, the more likely it will suffer from thinning liquidity. This month, I take a closer look at Australian cash and funding markets, how they have been impacted by the ongoing changes to global liquidity, and what that means for the opportunity set available to domestic investors.