Liquidity has killed before and could kill again

"Since 2008, high yield debt has gone from $300 billion to $900 billion. This is but one side effect of QE which has forced sovereign bond yields into negative real territory and sent yield hungry investors into the high yield market. While investors, mutual funds in particular, have been scrambling into junk bonds like fat kids after that last cupcake, the fundamentals in this market have been collapsing. The ratio of dealer inventory to fund/ETF holding has collapsed as shown above. Remember that banks act as the intermediaries between buyers and sellers providing liquidity to the market, and their holdings have gone from $286 billion to $96 billion – a mere 9% of inventory. Dealer inventory to US corporates has careened from 8% down to just 1%. In case readers aren’t 100% clear what this means let me explain with one word: LIQUIDITY. Banks and dealers provide liquidity in any market and this one is no different. That liquidity cushion has collapsed by over 88%. (Source: Value Walk) (VIEW LINK)


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