"Investors need to be prepared for higher volatility because of growing liquidity constraints, especially in certain parts of the bond markets," said Lynn Challenger, a co-author of the report and managing director of trading at Mellon Capital Management Corporation, a BNY Mellon investment manager. "They should consider their liquidity needs in both benign and turbulent markets and how they will source it."
Another defensive move suggested by the traders is for investors to maintain tighter tolerance ranges around asset allocation targets so they have a smaller effect on the markets when they need to rebalance.
However, the fragmentation of liquidity also is likely to create transitory distortions in prices, providing opportunities for those with readily available capital and the ability to deploy it before the opportunity disappears, said Amy Koch, a co-author of the report and managing director of fixed income trading at Standish Mellon Asset Management Company, a BNY Mellon investment boutique.
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