The Phaserl


China’s Stock Investors Panic; Bond Fund Managers Reassess Liquidity Risk

by Pam Martens, Wall Street on Parade:

After being up as much as 2.4 percent during the session, China’s Shanghai Composite Index plummeted over 8 percent in heavy trading in a two-hour period overnight, finally closing down 5.4 percent. At least one trigger for the rout was an announcement by a stock exchange clearing agency in China that lower-rated bonds will no longer be allowed as collateral for repurchase agreements, a move that instantly impacted credit market liquidity and sent sellers into the stock market to raise cash, according to a report at Bloomberg News.

China is far from the only country or market regulator that is worried. On November 25, 2014, the International Capital Market Association (ICMA) released a study by Andy Hill on the European corporate bond market which found that “A commonly held view is that a correction to the credit rally is inevitable and is likely to be severe. Some see the lack of liquidity in the secondary markets as exacerbating any correction, while others are more concerned about how a non-functional secondary market could impede any return to normality.”

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