Whether it is banks’ reluctance to commit to buying and selling bonds, shortages in the securities used as collateral in short-term money markets, or the disproportionate role of heavyweight issuers in the supply of U.S. corporate bonds, dysfunction is everywhere. As the Federal Reserve prepares to raise rates, this is raising questions about how well it can manage the credit creation process, the transmission mechanism through which it pursues its economic goals. It might also mean it is risking financial turmoil.
Bond geeks are decrying illiquidity – the idea that there aren’t enough standing bids or offers in the marketplace for investors to move quickly in or out of large positions. Combine that with the uncertainty that the Federal Open Market Committee has deliberately fostered around the timing of its f...
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