It will come as no surprise to any reader that volumes in general are dismal. This leads inevitably to the question of just how liquid markets are in general. This may not be a critical question for mom-and-pop buying some IBM or CAT at the margin but for institutional investors it is critical to the decision to enter a position. Pairing off reward expectations with risk concerns tends to focus too much on volatility and too little on liquidity and by looking at daily market turnover and the bid-offer spread of each asset class, UBS finds taking liquidity into account can make a huge difference to performance (and risk-appetite). Unsurprisingly, the most liquid assets are large cap equities and US Treasuries. The least liquid assets include various fixed income securities, and in particular high yield credit. Perhaps this goes a long way to explaining why US Treasuries have maintained their strength and why large cap equities have been so strong relative to credit markets (a topic we have discussed at length) as money finds its 'easiest' hole to fill and thanks to liquidity concerns, high yield credit investors remain more pragmatic entrants to an ever-inflating bubble of liquidity (as exits will be small and crowded at the first sign of tightening). We suspect the increasing dispersion between the most and least liquid securities in each asset class will likely feed on itself as fewer funds are willing to 'earn' an 'illiquidity' premium given the bigger binary risks facing all markets.
It is evident that credit markets are notably less liquid that equity markets (a fact well known to most market participants). This is a chart of the period post-Lehman, pre-S&P bottom - a relatively illiquid period...
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Compared to the current environment... SENSEX (comp EM) liquidity looks to have suffered the most but what is apparent is the widening spread between most and least liquid securities as new marginal money appears to have become bloated in a narrower and narrower group of securities...
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This is highlighted clearly here as equity market liquidity for relatively illiquid securities is as bad as it has ever been (while liquid securities have it as good as ever)...
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But credit liquidity remains much more 'jumpy' and considerably 'worse' than post-crisis highs with illiquid HY weakening once again as, perhaps thanks to the HY ETFs, we see liquid HY credit improving - though still an order of magnitude greater than equities...
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The clear concentration risk in both equities and credit should be cause for concern for retail and institutional investors alike as the crowd becomes more restless and gaps will become more likely. The lesson from credit markets remains one of more pragmatic entry, as opposed to short-term momo games, and maybe helps explain the lack of enthusiasm for credit compared to equity as the latter makes new cycle highs and the former remains considerably more concerned.