Investing Advice: Central Banks and Liquidity Issues
By: Steve Smith
We all know that ever since the financial crisis, Central Banks have been taking unprecedented and unconventional actions to intervene in the financial market, employing everything from negative interest rates to various forms of quantitative easing. In all of these cases, the objective is to provide liquidity and prop up asset prices. Today’s investing advice will explore the shortcomings of these efforts.
No country has been more aggressive in their monetary approach than Japan, where the BOJ stepped directly into both the stock and bond market, and is now the largest holder of both. It has become so extreme that Bloomberg reported not a single Japanese 10-Year Bond on Tuesday.
The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.
On the other hand, in the US, the Federal Reserve is beginning the process of curtailing its actions, and in the process removing liquidity.
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