Implications for market liquidity
In April 2015, the International Monetary Fund was warning investors about the implications for market liquidity* as a result of changes in macro liquidity.
"As U.S. monetary policy normalizes, the temporary boost to market liquidity provided by monetary accommodation will ebb, revealing a changed capital market landscape. Without the buoyant liquidity provided by the Fed, the liquidity-inhibiting impact of regulatory changes, industry consolidation, and other secular factors will likely become more pronounced. Markets could be increasingly susceptible to episodes in which liquidity suddenly vanishes and volatility spikes. Two recent price disruptions — the Oct. 15, 2014, volatility in U.S. Treasurys and the Jan. 15, 2015, surge in the Swiss franc — involved an initial shock that was likely amplified by market makers’ withdrawal of liquidity support. Many of the factors responsible for lower market liquidity also appear to be exacerbating risk-on/risk-off market dynamics and increasing cross-asset correlations during times of market stress. These phenomena suggest that low market liquidity may act as a powerful amplifier of financial stability risks."
To the aforementioned episodes, we can now add the recent repricing in German bunds in terms of magnitude, velocity, and time frame. Yields rose from 0.07% on April 20 to 0.98% on June 10, quite an impressive move in just 37 trading sessions (data: Bloomberg).
*Market liquidity refers to the liquidity conditions in a single market, and how easily one can buy and sell assets in that market. Generally, the less liquidity, the more buying and selling creates volatility in a single market.