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Get Used to Selloffs, Central Bankers Say as They Fret about the Terrifying Moment When Liquidity Evaporates

June 5, 2015

Get Used to Selloffs, Central Bankers Say as They Fret about the Terrifying Moment When Liquidity Evaporates

Axel Weber, president of the Bundesbank and member of the ECB’s Governing Council until he quit both in 2011 to protest the ECB’s bond purchases, quickly landed a new gig: chairman of UBS. WHIRR went the revolving door. From this perch, he warned in 2012 that the easy-money policies and the expansion of central-bank balance sheets would lead to “new turmoil in the financial markets.” Now that the turmoil has arrived, he’s at it again.

“Volatility and repricing” – a euphemism for losses – are “part of getting back to normal,” he told NBC. We should get used to it, he said, echoing what ECB President Mario Draghi had said a couple of days ago. So no big deal. However, he was fretting “about the liquidity in the market, in particular under stress situations.”

Despite unleashing a deafening round of QE on the European markets, the ECB has watched helplessly as government bonds have done the opposite of what they should have done: Prices have plunged, and yields have spiked. The German 10-year yield soared in seven weeks from 0.05% to over 1% on Thursday, before settling down a bit. And it wasn’t even a “stress situation.”

US Treasuries have sold off sharply as well since the beginning of February, with the 10-year yield jumping from 1.65% to 2.31%, the worst selloff since the taper tantrum in 2013.

Now one word is on the official panic list: “liquidity.” They’re thinking about the terrifying moment when it suddenly evaporates.

Weber blamed central banks for the liquidity issues in the global bond markets. They’ve been buying “vast amounts of assets and putting them on their balance sheets”; not just government bonds but also corporate bonds. Since central banks “buy and hold,” they “take some liquidity out of the market.”

 

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