By Davide Barbuscia

NEW YORK (Reuters), Speculations about wild swings in asset values following Russia’s invasion of Ukraine have prompted some investors to lower their risk, fearing other markets might be hit by similar volatility.

At issue is liquidity – or the ease at which investors can buy or sell an asset without affecting its price. In spite of sharp market movements over the past decade due to episodes of low liquidity, there have been signs of stress in the recent weeks. These have been exacerbated by anything from Russian sanctions to central bank tightening.

Investors are concerned that liquidity could continue to decline in markets. This is because investors fear that assets such as other commodities will be affected by the same violent price swings which have decimated commodities in this month’s market turmoil. These include a one-day double in nickel prices, and an increase in oil to 14 year highs.

Frances Donald (Global Chief Economist, Manulife Investment Management) stated that “it isn’t always obvious where the contagion risk lies.” This is why it’s important to monitor liquidity, and not only daily but also hourly, in order to detect signs of problems.

Markets are experiencing increasing stress from financial indicators.

FRA OIS spread measures the gap between U.S. forward rates and overnight swap rates. It was last seen at its highest point since May 2020. Another closely monitored short-term funding stress gauge was the spread between U.S. Libor (three-month) and the overnight swap rate. Volatility in stock, currency and U.S. Treasury yields have also increased.

A potential red flag is Barclays (LON) Monday saw the suspension of sales of two products related to and market volatility. Some view this as a sign that there is a lack of liquidity.

Investors have reduced assets such as emerging market bonds. This asset saw $3.54 trillion in net outflows, the largest decrease since April 2020. According to BofA Global Research, Treasuries saw $5.4 billion of inflows over the last nine weeks.

Mike Vogelzang from CAPTRUST Boston was Chief Investment Officer. His firm took “aggressive actions” to address the Ukraine crisis and reduce portfolio risk. This included reducing equity exposure, selling mortgages and many corporate bonds and replacing them with short-term U.S. Treasuries.

He stated that he was worried about “a potential liquidity crisis on a global scale.” We were previously significantly overweight in U.S. Treasuries relative to benchmarks over years, so we filled the bucket and decreased the risk of portfolio illiquidity.”

Vogelzang said events like last week’s spike in nickel prices – which came as one of the world’s top producers bought large amounts of nickel to cover bets on falling prices and cover costly margin calls – indicate the potential for “liquidity panic” in markets.

Investors also mentioned counterparty risk. This refers to the possibility of defaults on contractual obligations that are linked to an underlying product. The Securities and Exchange Commission issued a warning Monday that highlighted the risks associated with concentrated prime brokerage counterparties.

DoubleLine’s Global Bond Portfolio Manager Bill Campbell is worried about the effect the Ukraine crisis has on an “important” component of the global supply chain. This affects both energy prices and vital commodities like wheat. Both Russia and Ukraine are large producers.

Campbell is reducing his exposure to Eastern European nations in his portfolios. He wants to diversify investment between commodities importing and exporting countries, to lower risk.

He stated, “We must be more confident that the crisis will be contained in the region.”

Sage Advisory’s fixed income portfolio manager Ryan O’Malley stated that conflict caused liquidity issues in the corporate market. He was forced to move his portfolio more towards Treasuries and other liquid assets.

O’Malley explained that “we’re trying get more liquid.”