US funds' liquidity deteriorates after negative news, US Fed study says

15 August 2019 8:08am
Mutual funds that invest in less-liquid securities such as small-cap equities and high-yield corporate bonds undergo further liquidity declines following negative economic and market news, a US Federal Reserve study found.

“The effect is more pronounced during stress periods, suggesting that a deterioration in the funds’ liquidity could amplify vulnerabilities in situations of already weak macroeconomic conditions,” the recent study said.

The 27-page report added: “If investors perceive that the liquidity of the fund they are invested in is at risk, they might run on the fund, in a process similar to a bank run”.