Low interest rates and other central bank policies in the United States have sent investors looking for higher returns on their investments. Money is pouring into mutual funds and exchange-traded funds, which is fueling a mispricing of credit and a build-up of risks to liquidity in the markets—the ability to trade in assets of any size, at any time, and to find a ready buyer.
Mutual funds and exchange-trade funds are the largest owners of U.S. corporate and foreign bonds (Chart 1). This means they provide a lot of credit to grease the wheels of the financial system because they have taken investors’ money and lent it to corporates.
Filed under: Advanced Economies, Economic Crisis, Economic outlook, Economic research, Emerging Markets, Employment, growth, IMF, International Monetary Fund, Reform | Tagged: central bank, exchange-traded funds, Global Financial Stability Report, liquidity, liquidity mismatch, monetary policy, money market mutual funds, United States | Leave a comment »