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Financial Condition causing Fund Managers Nightmares?

As global interest rates rise due to inflation financial conditions get more difficult. These financial conditions for a fund manager are measured in terms of liquidity, volatility and leverage cost along with the availability of funds to meet withdrawals.

The last quarter of 2021 was the easiest time in terms of financial conditions and recent quarters have been the most difficult. The impact of these conditions has already caused two major events in the financial markets. First was the UK government bonds falling 9% within days as Liability Driven Investments (LDI) faced margin calls.

The second instance occurred more recently when BlackRock suspended withdrawals from the UK property fund as redemptions were large and the portfolio along with market liquidity did not support selling.

Another instance is when PIMCO rescued the value of the largest Bond Fund in the world by 0.6% overnight. A similar action in the fund occurred during August 2022 post that NAV fell by 5% within a few months.

All these instances have occurred in a matter of quarters and yesterday's Federal Reserve meeting details indicate that rates will remain high this year as well with some upside risks as the focus remains to increase the tightening in the financial conditions.

It is done to bring demand down that brings inflation down. But if the rates and financial conditions tighten for a longer period than estimated then there will be a panic leading to a large withdrawal of funds from all assets. Bringing the Global Financial crisis flashbacks to all the bankers and investment managers.

Whether it does take place or not only time will tell but we are at the closest point of history repeating itself since the event took place 14 years ago.


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