If fund managers have these motives in aggregate, the market can become temporarily one-sided, leading to shortages of safe and liquid bonds and hence strains on market liquidity more broadly.
Second, FCF’s liquidation occurred against a backdrop of heightened uncertainty in corporate bond markets.
In this post, we examine whether FCF’s announced liquidation affected liquidity and returns in broader corporate bond markets.
The chart also shows that the bonds with the lowest returns on December 11 (those in the bottom quintile) had already been suffering steady losses in the months prior.
On the actual event day, the high-return group experienced the largest increase in price impact, while the medium-return group, whose prices responded the least to the Third Avenue event, showed the smallest increase in price impact.
Note that none of these changes were large by recent standards.
The investor redemptions followed poor performance of the fund and forced FCF to try to sell assets to meet those redemptions.
This created a direct and mechanical need for immediacy in the segment of the corporate bond market in which FCF specialized.
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