by Altaf Kassam, Head of Investment Strategy & Research EMEA at State Street Global Advisors.
Across regions and asset classes we are seeing liquidity conditions slowly improve, although there’s still a lot of healing needed.
In equities, markets are slowly improving, with spreads starting to narrow in some areas. General liquidity is still challenged, however, and may remain that way as long as overall volatility remains higher.
In fixed income, investors have shifted their buying interest back toward risk, corporate issuers have been locking in financing at low Treasury rates (albeit high spreads) to secure liquidity for the next phase in the cycle, as the Fed has been easing off on purchases. The effort to improve liquidity is working: where transacting in Treasuries cost 10 times its ‘normal’ rate through much of the month of March we’ve now come down to a level about 5 times normal. Agency MBS too have seen much more stability and improved liquidity that is working through the system.
In foreign exchange, the positive risk environment has continued to support improved liquidity and a slight improvement in bid-ask spreads, as well as order book depth. Trading spreads are now much more attractive than most of March, but still much higher than in early January. USD carry is stable near 12bps against the G10 average while the cross-currency basis continues to point to a saturation of USD liquidity in currency forward markets. USD forward market yields are below USD Libor yields.