Oxford Economics: Major liquidity drain may fuel bond market vulnerabilities

Research note

The liquidity drain resulting from central bank quantitative tightening will "exacerbate" upward pressure on bond yields, with US markets the most vulnerable, Oxford Economics has warned.

In a research note, Oxford Economics said cross-border purchases, a measure of global liquidity, were on the decline due to central banks beginning to scale back their asset purchases. In October last year, the Fed started reducing its $4.5trn balance sheet, while the ECB has set a September 2018 date to end QE, although president Mario Draghi has said the bank will extend its purchases "if necessary". "Policy normalisation turns up the heat," Guillermo Tolosa, economic adviser at Oxford Economics, said. "Global liquidity is expected to tighten as crossborder purchases decline in comi...