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October 7, 2015

Beware of the liquidity delusion

“Is the fragility of market liquidity a reason for concern? The “flash rally” in US Treasury bonds in October 2014 and the “German tantrum” in April 2015 show that dislocations can occur even in markets for highly liquid assets. A rise in US interest rates might cause more disruption. Some add that new regulations constrain the ability of banks to act as market makers and so reduce the liquidity of markets in riskier assets.”

“How far should we share these concerns? Market liquidity is likely to disappear when one needs it most. Building our hopes on its durability is risky.”

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Read the full Financial Times Column by Martin Wolf here.

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